The Federal Reserve intends to impose a capital surge on the largest U.S. banks to lower the risks that come with certain financial firms that are still “too big to fail.” The requirement will require these institutions to maintain bigger cushions against possible losses.
Fed Governor Daniel Tarullo gave testimony about this planned surcharge in front of a Senate Banking Committee hearing earlier this month. The Fed also reportedly intends to penalize banks that depend too much on volatile types of short-term funding.
Ever since the 2008 economic crisis, banks have increased their capital and must abide by new rules. The Wall Street Journal reports that according to Federal Financial Analytics’ examination of six U.S. banks, between 2007 and 2013 these firms upped their capital by $29.07 billion.
Meantime, Fed officials have yet to determine an exact range for this planned surcharge. Although up to 4.5% for certain banks could be imposed, Tarullo noted that the surcharge levels for certain systematically important financial institutions likely would increase “noticeably” but not necessarily for all banks.
The planned surcharge increase is just one of the latest initiatives by Washington to enhance the banking system and make sure that large Wall Street firms are better to able to protect themselves in the event of losses. Also this month, the Fed passed a rule requiring big banks to keep enough liquidity assets in place in the event of another economic meltdown.
Financial institutions that have at least $250 billion in assets or $10 billion in foreign exposure have to retain enough easy-to-sell securities and cash to stay in business for 30 days if there is a credit crisis. Smaller intuitions that have at least $50 billion in assets have to keep 30% less liquid assets. Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and twelve other big banks would have to meet this requirement, along with twenty smaller banks.
Fed to Hit Biggest U.S. Banks With Tougher Capital Surcharge, The Wall Street Journal, September 9, 2014
Fed requires banks to amp up crisis protection, USA Today, September 23, 2014
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