The Federal Reserve will move Tuesday to establish tougher capital requirements on the eight biggest U.S. banks.
Officials at the central bank announced the details of a new “capital surcharge” rule Tuesday just before the Federal Reserve Board of Governors was scheduled to vote on the proposal.
One official described the rule as the Fed’s signature effort to address the risks to the financial system of outsized banks, and to make those banks internalize the costs they would place on the financial system and government in case they generated another financial crisis.
The rule would require the biggest banks to raise their capital levels, as a share of total risk-weighted assets, by between 1 percent to 4.5 percentage points above what is required by existing rules, depending on the bank and its assets and liabilities.
That higher level of equity would limit the banks’ reliance on borrowing and would allow them to sustain greater losses without failing, with the goal of making them safer in the case of a panic.
Fed Chairwoman Janet Yellen said in comments prepared for Tuesday’s meeting that the new rules would force the banks “to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability.”
The rule would apply to systemically important banks with more than $50 billion in assets. The banks that would be affected, based on their size and characteristics in 2013, are Bank of America, Bank of New York Mellon, Citibank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.
Those banks already have had to significantly boost their capital levels in the wake of the financial crisis, thanks to new regulations. The new rule would be phased in through 2019, but officials said that almost all the banks would meet its requirements if it were in effect today. The total capital shortfall would be $21 billion.
The rule was written under the authority of the 2010 Dodd-Frank financial regulatory overhaul and as part as the international Basel accords on regulation.
The U.S. version of the rule, said Fed Governor Daniel Tarullo in prepared remarks, was intended to be stricter than the internationally agreed-upon level. It also will require banks to have greater equity if they rely more on short-term loans that can leave them more susceptible to runs.
Tarullo said the toughness of the rule depends on the extent to which each bank poses a risk to the financial system. That size and interconnectedness, Tarullo said, “lay at the heart of the recent financial crisis.”
Following a vote by the Board of Governors, the rule would be opened up for comment.
