The Federal Reserve, which regulates banks in addition to its high-profile role in monetary policy and setting benchmark interest rates, suggested that the rules could create an incentive for banks to remain smaller, presenting less systemic risk in the event of a failure.
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The rule does not require the firms to meet the surcharges in the Fed’s so-called stress tests, an annual health check during which banks have to run through a simulated severe economic and financial crisis.
Most USA banks are already in compliance with the rules, but JPMorgan is facing a $12.5 billion shortfall for the compliance procedures. JPMorgan Chase faces the largest potential surcharge of 4.5 percent of its risk-based capital.
Also unlike the Basel agreement, US firms will be evaluated on how much they rely on short-term funding – even as the agency gave them a break on how it calculates that dependence in this final rule. The new additional layer of requirements for the biggest banks also exceeds the levels mandated by worldwide regulators.
“We think it’s important and are grateful that the Federal Reserve has taken GE Capital’s submissions, circumstances and exit plan into account”, GE Capital said in a statement following the Fed meeting. Most of the rules wouldn’t take effect until January 1, 2018.
The rule subjects USA firms to capital requirements stricter than those faced by their peers overseas – in some cases nearly twice the extra capital demand faced by foreign competitors.
Citigroup’s estimated surcharge of 3.5% is the second-largest in the group.
The Federal Reserve chairman Janet Yellen said: “A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others”. Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) are at 3%. He said he expects that Fed staff this year will develop recommendations including changes that would make the stress tests “better address systemic risks arising from correlations in the exposures and activities” of large banks. The new surcharge requirement comes on top of a base 7% common-equity capital requirement that most banks face under worldwide banking rules. On July 9, Fed Governor Lael Brainard said “it will be important to assess incorporating the risk-based capital surcharge in some form”, reinforcing the industry’s expectation it’ll happen.
The Fed governors also unanimously adopted standards for new supervision by the Fed of General Electric Co.’s finance arm, which will be subject to rules similar to those governing big banks.
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The Federal Reserve Board of Governors voted Monday for a two-stage plan for supervising GE Capital to allow for the possibility that it might go through with its plan, announced in April, to significantly shrink itself and thereby shed its “systemically important” label. The rates are calculated under two methods that gauge the company’s size, interconnectedness and complexity, and banks must use whichever is highest.
