The Federal Reserve’s action means that eight banks together will be required to shore up their financial bases with about $200 billion in additional capital.
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Bloomberg News reports that the Fed assigned capital charges totaling more than $200bn for eight of the biggest and most complex US banks to mitigate the danger that they could threaten the financial system. In keeping with the spirit of that legislation, Fed officials say the capital requirement is designed to encourage the biggest banks to shrink and take other steps to reduce the threat their potential failure poses to the financial system.
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.
If a bank relies on this wholesale funding instead of retail customer deposits, it is much more vulnerable to a “run” by creditors when markets seize up, as they did in 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.
The final rule establishes the criteria for identifying a GSIB and the methods that those firms will use to calculate a risk-based capital surcharge, which is calibrated to each firm’s overall systemic risk. FSOC has given the systemically important label to GE Capital, and insurers MetLife, American global and Prudential Financial.
“This approach will assure that GECC maintains important loss buffers for its continuing operations while it executes its divestiture strategy”, Fed Governor Daniel Tarullo said. The company came under the Fed’s supervision. That would give GE Capital time to carry out its plan of selling off the majority of its assets.
The rule was largely similar to when it was proposed in December, when the United States central bank and bank regulator said the firms would face a surcharge of between 1% and 4.5% of their assets.
“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.
Eight U.S. companies that are identified as GSIBs under the rule include the Bank of America; The Bank of New York Mellon; Citigroup; The Goldman Sachs Group; JPMorgan Chase & Co; Morgan Stanley; State Street; and Wells Fargo & Company. If that happens, the Fed’s action will be cancelled.
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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.
