New rule to strengthen capital positions of US banks proposed by Fed

BY Fraser Tennant

The Federal Reserve has proposed a rule to bolster the capital positions of the largest US banks.

Designed to maintain the strength of large banks such as JPMorgan Chase and Goldman Sachs, the Federal Reserve's proposal would involve increasing the capital requirements of the aforementioned banks as well as six others.

By increasing the requirements of these eight largest banks, the Federal Reserve is seeking to make them more shock resistant as, the Fed points out, a bank with more substantial levels of capital is less likely to depend on borrowed money during periods of financial distress.

The Fed’s proposed rule is also intended to reduce the impact a bank in distress can have on the domestic as well as global economy effectively an attempt to reign in the ‘too big to fail’ mentality.

In addition to Goldman Sachs and JPMorgan Chase, the other banks involved in the proposed new regulation are Morgan Stanley, Citigroup, State Street, Bank of New York Mellon, Wells Fargo and Bank of America.

All these banks would be required to fully comply with the Federal Reserve’s new rule by early 2019.

Fed chairwoman Janet L. Yellen said that the proposed rule “might persuade banks to shrink” and “would encourage such firms to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability”.

Although the Fed has said that most of the eight banks already meet the new requirements of the new rule, having raised billions of dollars of new capital in the years since the financial crisis, a further $21bn in additional capital is understood to be necessary with JPMorgan Chase stating that it will be the “hardest hit”.

“While we’re still reviewing the Fed’s proposal, we are well capitalised and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders”, said Andrew Gray, a JPMorgan spokesman.

While responses to the Fed’s proposals have been broadly positive, some dissenting voices have been heard, including that of Richard Foster, a vice president of the Financial Services Roundtable. He said “Holding US banks to a more stringent capital framework than our global competitors could be a misguided economic decision”.

News: With New Capital Rule, Fed Nudges Big Banks to Shrink

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