The Fed today proposed capital requirements on 8 banks that could exceed global minimums by up to 4.5%.
Worried about the systemic risk of banks reliant on short-term market funding the Federal Reserve proposed new capital rules on big banks that would see eight firms needing to meet surcharges of about $21 billion in the aggregate.
The banks in question are: JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC), Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS), Wells Fargo & Co (NYSE:WFC), Bank of New York Mellon Corp (NYSE:BK) and State Street Corp (NYSE:STT).
While there will be no shortage of opposition to the proposed rules, the Fed quickly pointed out that “almost all” of the eight meet the proposed requirements. In an effort to avoid a repeat of 2008, the Fed has taken aim at the amount banks borrow from institutional investors with short-term contracts.
Big banks: Fear of the short-term contract
Speaking to those short-term contracts and a belief that the U.S. requires more stringent capital requirements than the rest the world was the head of the Fed.
“Reliance on short-term wholesale funding is among the more important determinants of the potential impact of the distress or failure of a systemically important financial firm on the broader financial system,” Fed Governor Daniel Tarullo said. “Unfortunately, the surcharge formula developed by the Basel Committee does not directly take into account reliance on short-term wholesale funding.”
While there will certainly be support for the proposed measures by some economists and others, let’s face it, the average American couldn’t give a single reason for the crisis of 2008 beyond “greed.” On the other hand, banks know that this ties their hands a bit and were ready for the announcement even before it was made.
Opposition before and after Tarullo’s comments
“The U.S. once again chooses to go its own way and exceed international minimums,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., told Bloomberg before today’s announcement. “If they squeeze the big banks too much, they’ll force some out of some businesses.”
Following the announcement, the Financial Services Roundtable released the following statement:
“Today’s proposal could affect the American financial industry’s ability to remain competitive in international markets,” said Richard Foster, FSR’s Vice President & Senior Counsel for Regulatory and Legal Affairs. “FSR supports regulations that improve financial stability and encourage consumer access to financial services, but holding U.S. banks to a more stringent capital framework than our global competitors could be a misguided economic decision.”