WASHINGTON The Federal Reserve on Monday adopted a rule for the eight largest US banks to hold more equity capital, amid fears on Wall Street that the measure may make it less profitable.
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The rule was largely similar to when it was proposed in December, when the USA central bank said the banks would face a surcharge of between 1 percent and 4.5 percent of their assets. The ruling establishes minimum holdings among what the Fed dubs global systemically important banks, or GSIBs, the firms with the most risk-based endeavors.
JPMorgan Chase is the only one of the big banks that doesn’t already meet the new financial requirements, which will be phased in from 2016 through 2018. In December, Fed governor Stanley Fischer, in an apparent slip, disclosed that J.P. Morgan was about $21 billion short.
The Fed governors led by Chair Janet Yellen voted 5-0 at a public meeting to impose the so-called “capital surcharges” on the eight banks.
Banks would have to meet this additional capital requirement with common equity, considered the highest form of regulatory capital because it can directly absorb losses.
Also unlike the Basel agreement, USA 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 larger the bank’s economic impact, the bigger threat it poses in the event of another crisis.
The size of each bank’s additional capital requirement is tailored to the firm’s relative riskiness, as measured by the Fed’s formula, which considers factors such as size, entanglements with other firms and internal complexity.
Banking industry groups say the Fed requirements could limit access to loans for businesses and consumers, by reducing the amounts that banks would have available to lend.
“The surcharge gives big banks a choice”, Dow Jones said.
But the rules would only kick in over a number of years, giving the company time to shrink its business and bring it below the supervisory thresholds. The Fairfield, Connecticut-based company reached deals in June to unload its vehicle fleet- management and European buyout-lending divisions.
The new Fed standards for supervision may not actually take effect or may be temporary because parent General Electric, one of the world’s biggest companies, has been selling off GE Capital’s businesses. Its general counsel, Brackett Denniston, said the finance unit will apply to lose its systemically important label sometime next year. In recognition of GE Capital’s efforts to shrink, the Fed said it would roll out its set of standards in two phases.
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“We think it’s important and are grateful that the Federal Reserve has taken GE Capital’s submissions, circumstances and exit plan into account in finalizing the order”, GE spokesman Seth Martin said in a statement. Goldman Sachs (GS), Wells Fargo (WFC) and Bank of New York Mellon (BNY) would also face surcharges. JPM had the highest surcharge level at 4.5 percent followed by Citigroup with 3.5 percent.
