US banking regulators have ordered the eight largest “too big to fail” banks to raise capital levels in a bid to address weaknesses seen in the 2008 financial crisis.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department’s Office of the Comptroller of the Currency on Tuesday adopted a final rule requiring the banks to hold significantly increased levels of high-quality capital in relation to their risk exposure, their so-called supplementary leverage ratio.
The banks affected by the rule are Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.
The Fed’s aim is “to reduce the effect of a firm’s failure or material weakness on the financial system and the broader economy.”
Under the action taken on Tuesday, the banks will have to meet an additional 2.0 per cent of capital on top of the 3.0 per cent level required under the Basel III regulatory reforms, which US regulators have criticized as too lax.
By meeting the 5.0 per cent ratio, the banks will avoid Fed limitations on dividends and discretionary bonus payments.
The eight banks’ subsidiaries will be required to have loss-absorbing capital worth more than 6.0 per cent of their assets, double the Basel III level.
The supplemental level, like the 3.0 per cent Basel level, will take effect in 2018.
Fed Chair Janet Yellen said the robust capital standards were “essential to reduce systemic risk and mitigate the distortions imposed by institutions deemed too big to fail.”
Fed Governor Daniel Tarullo said the bigger capital cushion would serve as a “critical backstop” to the banking system.
The director of the FDIC, Jeremiah Norton, noted that the new rule would help offset weaknesses in the Basel III reforms, which failed to address key industry problems highlighted in the financial crisis, like the appropriate risk-weighting for mortgages and foreign sovereign debt.
“These and other deficiencies underscore the need for the US banking system to have a meaningful leverage ratio requirement and for policy makers to continue to improve the capital framework going forward,” he said.