The US Federal Reserve on Monday set tough new capital surcharges for the country’s eight largest banks in a new post-economic crisis effort to reel in “too-big-to-fail” institutions.
However, of the eight, only one is currently below the new capital threshold: JPMorgan Chase & Co, which needs to come up with an additional US$12.5 billion in capital by January 2019, when the new rules are to be fully phased in.
Besides JPMorgan, the institutions identified as global systemically important banks (GSIBs) and subject to the new rule are Bank of America Corp, Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Bank of New York Mellon Corp, Citigroup Inc and State Street Corp.
The rule is designed “to reduce the risks posed by a GSIB to US financial stability,” the Fed said.
The extra capital required would help “to ensure that the GSIB has sufficient capital to continue its operations during times of stress and to protect the financial system from the spillover risks of its failure.”
Essentially, the new rule requires banks to increase their levels of equity to account for higher-risk activities, or to cut back those activities.
Since the rule was first proposed last year, all eight banks have taken action to meet the new standards, trimming in-house trading divisions, cutting exposure to certain high-risk financial markets, boosting long-term funding levels and adding to their capital cushions.
In December last year, the Fed had made clear that seven already met the new requirements. Alone in falling short, JPMorgan was said at the time to need about US$22 billion in new capital.
The bank had been singled out in a congressional report in November last year as having a particularly high and risky exposure to the physical commodity market.
The threat of risky activity by the largest banks to the financial system became clear in the 2008 financial crisis, when the US government was forced to prop up some of the largest institutions to protect them from large losses and extreme funding vulnerabilities.
Since the crisis, global banking regulators have made extensive efforts to identify “systemically important financial institutions,” also called “too-big-to-fail” because their failure had the potential to weaken the entire financial system.
Fed Chair Janet Yellen said during the meeting to finalize the new rules on Monday that the main aim of the capital surcharge “is to require the firms themselves to bear the costs that their failure would impose on others.”
“This final rule will confront these firms with a choice: They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system,” she said.
However, banks continued to say that the surcharge was an unfair burden on their business. The Financial Services Roundtable said the US rules would leave the banks at a competitive disadvantage to foreign competitors enjoying lower capital requirements.
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