The Federal Reserve System has approved a new rule which requires eight key banks in the USA to hold additional capital buffers in a bid to avoid a major financial collapse.
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Most of the banks have already put away the additional capital.
The Federal Reserve is calling upon USA banks to keep more cash on hand. The extra capital requirements will increase in proportion to how risky the Federal Reserve believes a particular bank to be to the financial system. It is imperative to state that it was the short term credit markets that froze up during the financial crisis of 2008.
According to a front-page headline in today’s Wall Street Journal, the Fed is getting tough in pushing big banks to get smaller; according to the article’s text, it’s doing nothing of the sort. In recognition of GE Capital’s efforts to shrink, the Fed said it would roll out its set of standards in two phases.
Also unlike the Basel agreement, U.S. 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. FSOC has given the systemically important label to GE Capital, and insurers MetLife, American global and Prudential Financial. The company, based in Norwalk, Connecticut, issues a range of loans for consumers and companies. That could lead to the “systemically important” designation being removed as the financial company shrinks. That would give GE Capital time to carry out its plan of selling off the majority of its assets.
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.
But the act now belongs to history and to the regulators charged with enforcing it, and it is the action by Tarullo and the Fed to push banks to downsize that is the most fitting way to honor Dodd-Frank.
“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. The numbers were in line with an estimate by Goldman Sachs analysts in December. The Fed said it expects all eight banks on the list to meet their surcharge requirement by 2019. though JPMorgan Chase, the biggest US bank, faces a $12.5 billion shortfall.
Effective Jan, 1, 2016, GE Capital must comply with risk-based and leverage capital requirements, the liquidity coverage ratio rule, and related reporting requirements, the Fed said.
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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.
