The Federal Reserve on Monday was poised to approve large surcharges on some of the biggest USA banks in an effort to offset risk and reduce the likelihood of another financial crisis similar to the one that threatened the global economy in 2008.
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The Wall Street Journal reported in late February that J.P. Morgan would begin charging large institutional customers fees for certain deposits, known as nonoperational, citing new rules that make holding money for clients too costly, including the pending capital surcharge.
Under the plan, the firm would face the bare minimum capital and liquidity requirements starting in 2016 and wouldn’t face the “full panoply” of Fed rules until 2018, Tarullo said.
Most of the banks have already put away the additional capital.
The size of each bank’s additional capital requirement is tailored to the firm’s relative riskiness, as measured by a formula created by global regulators and the Fed. The Fed’s formula roughly doubles the surcharge amount for each USA bank compared with the worldwide version of the rule, Fed officials said. Using that calculation, the banks would then be required to pay a surcharge based on their economic importance.
GE Capital’s attempt to evade the label of “systemically important” is of significant interest to the financial industry and members of Congress who have anxious that the designation is a regulatory “Hotel California”, burdening companies with added regulations but providing them with no way out. 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.
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 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. 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. Based on current figures, surcharges on USA banks would range from 1 percent to 4.5 percent.
The surcharge imposed by the US central bank would be even larger than those imposed on foreign banks under the Basel Committee requirements initiated a few years back. Goldman Sachs edged up fractionally.
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Lehman Brothers collapsed in September 2008, triggering the worst effects of the crisis.
