GE Capital was under scrutiny because USA regulators in 2013 judged its failure could hurt the broader USA economy and designated it “systemically important”, a label created under Dodd-Frank that brings stricter oversight to such firms from the Fed. Currently, all of the eight banks meet the capital requirement or are on track to do so, except J.P. Morgan Chase, which falls short by $12.5 billion. JPMorgan, the largest USA bank by assets, has the stiffest capital surcharge at 4.5 percent of its assets.
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Under the final rule, JP Morgan Chase will face a capital “surcharge” of 4.5% of its risk-weighted assets.
These kinds of restrictions on banks have prompted worries about unintended consequences, such as volatility in financial markets that a few ascribe to banks being less willing to take on risk.
The banks in aggregate would have to keep an additional $200 billion in capital, as the Fed continues to take steps to safeguard the banking system seven years after the financial crisis.
Speaking at the Fed meeting, Governor Daniel Tarullo said that “it would not be sensible for us to disregard GE’s announced plan to reduce [General Electric Capital Corporation’s] size by 70 percent, particularly in light of the fact that it is demonstrably executing that plan”.
The Fed also gave numerical estimates of what the rule would mean for each of the banks.
Adding all or part of the surcharge to the minimum capital levels banks must meet in the stress test, designed to ensure a bank could survive a sharp crisis, would likely require the banks to boost their capital levels even higher. “They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system”. Those markets seized up during the 2008 financial crisis. Wells Fargo & Co.is at 2 percent, while State Street Corp. and Bank of New York Mellon Corp. are at the low end – 1.5 percent and 1 percent. Consequently, the larger the surcharge that bank will be required to pay.
After Lehman failed, the government invested billions in big banks, including Citigroup (C) and Bank of America (BAC), to stabilize the financial system.
The surcharges have been controversial because USA banks are being held to higher standards than their global competitors. The new surcharge will begin being phased in at the beginning of 2016.
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. 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.
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As with its other major rules, the Fed capital measure goes beyond what global regulators in Basel, Switzerland, negotiated for “systemically important” banks.
