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.
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A bank’s surcharge can grow or shrink depending on changes such as size, complexity and entanglements with other big firms.
The Federal Reserve will meet on Monday to adopt a new rule for the eight largest USA banks to hold more equity capital, amid fears on Wall Street that the measure may make it less profitable.
The Fed’s final rule also reduced how heavily banks would be penalized for relying on certain of types of short-term funding, including wholesale deposits. FSOC has given the systemically important label to GE Capital, and insurers MetLife, American global and Prudential Financial.
The Fed also gave numerical estimates of what the rule would mean for each of the banks.
Access Investor Kit for JPMorgan Chase & Co. It had struggled during the crisis due to mounting defaults and losses on loans in areas like credit cards, commercial real estate and heavy equipment. It is being permitted to do so because its parent company, General Electric, is in the midst of shrinking its finance arm and is in the process of trying to get de-designated as a nonbank SIFI. That could lead to the “systemically important” designation being removed as the financial company shrinks.
The Financial Stability Oversight Council, which is headed by Treasury Secretary Jacob Lew and includes other top regulators such as Yellen, hasn’t yet reversed its ruling. 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.
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”.
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.
Altogether, the policy would require more than $200 billion in reserves from eight banks that the Fed expects will be identified as globally systemically important. The extra capital requirements, or surcharges, range from 1 per cent to 4.5 per cent of the banks’ risk-weighted assets, leaving the firms to choose between expensive capital demands or getting smaller.
JPMorgan – the biggest USA bank by assets – faces the full brunt of the rule, with a 4.5 per cent cushion, while Citigroup is next in line, with 3.5 per cent. Goldman Sachs, Morgan Stanley and Bank of America are all at 3 per cent. Wells Fargo is at 2 per cent, while State Street and Bank of New York Mellon are at the low end – 1.5 per cent and 1 per cent.
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Stricter capital requirements for banks were mandated by Congress after the financial crisis, which struck in the fall of 2008 and ignited the worst economic downturn since the Great Depression.
