US Federal Reserve finalises new capital rule for banks

US central bank implements new rule for country’s biggest financial institution, forcing them to maintain layer of capital to protect against losses

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

The Federal Reserve on Monday adopted a rule for the eight largest US banks to hold more equity capital, despite fears on Wall Street that the measure may make it less profitable.

The rule was largely similar to when it was proposed in December, when the US central bank and bank regulator said the firms would face a surcharge of between 1 percent and 4.5 percent of their assets.

The Fed also gave numerical estimates of what the rule would mean for each of the banks. The numbers were in line with an estimate by Goldman Sachs analysts in December.

Regulators want US banks whose failure could threaten markets to fund themselves more with shareholder equity, and less with borrowed funds.

They also want to discourage banks from relying on unstable short-term borrowing, a key contributing factor to the demise of Lehman Brothers at the height of the financial crisis.

"They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink," Fed Chair Janet Yellen said in a statement.

JPMorgan Chase & Co faces the highest surcharge at 4.5 percent, followed by Citigroup at 3.5 percent.

All the firms were on their way to meet the surcharges over the three-year period during which they will need to implement the measure, the Fed said. Seven already meet it now.

Only JPMorgan faces a shortfall of $12.5 billion at the moment, Federal Reserve staff said on a conference call. In December, that number still stood at some $20 billion.

The company said in February that it would do "whatever it takes" to keep the surcharge below 4.5 percent.

The rule does not require the firms to meet the surcharges in the Fed's so-called stress tests, an annual health check during which banks have to run through a simulated severe economic and financial crisis.

But the Fed later this year would look at changing the stress test procedures to better address systemic risk arising from the largest financial institutions.

The Fed also laid out how it would oversee General Electric Capital Corp, the financial arm of GE, one of four non-bank firms the Fed is overseeing after the crisis because of their significance to the overall system.

But the rules would only kick in over a number of years, giving the company time to shrink its business and bring it below the supervisory thresholds.