Date
19 September 2017
The Federal Reserve believes that big banks reliant on short-term market funding pose great systemic risk. Photo: Bloomberg
The Federal Reserve believes that big banks reliant on short-term market funding pose great systemic risk. Photo: Bloomberg

Big US banks face capital requirement above global minimum

The Federal Reserve has proposed that big US banks be required to increase the amount of capital they set aside to guard against unexpected losses.

While the central bank stopped short of listing the capital surcharges for the eight top banks, it said they will probably be between 1 percent and 4.5 percent based on 2013 data — exceeding the maximum of 2.5 percent set by international regulators, Bloomberg reported.

The aggregate amount the eight banks need to meet the surcharges from current levels is around US$21 billion, according to Fed officials.

The stiffer rules could reduce returns for shareholders, but the Fed said “almost all” of the firms already meet the new requirements, and all are on their way to meeting them by the end of a phase-in period that runs from 2016 to 2019.

The new US regulations will focus on how much the banks borrow from institutional investors in short-term contracts, a form of funding deemed riskier during a crisis.

“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 was quoted as saying.

“Unfortunately, the surcharge formula developed by the Basel Committee does not directly take into account reliance on short-term wholesale funding.”

The eight US firms covered by Fed’s proposal are JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp.

Goldman Sachs and Morgan Stanley could be hurt most by the proposed rule as short-term funding accounts for about 35 percent of their liabilities, compared with 20 percent for the others, the report said, citing data compiled by Keefe, Bruyette & Woods Inc.

– Contact us at [email protected]

RA/CG

EJI Weekly Newsletter

Please click here to unsubscribe