Big U.S. banks face capital surcharges of as much as 4.5 percent as the Federal Reserve readies new capital rules that single out firms reliant on short-term market funding as posing the greatest systemic risk.
The Fed today proposed two methods to calculate what capital surcharges eight big U.S. firms will face on top of those already levied on the world's largest banks by international regulators. While the central bank stopped short of listing the surcharges for each firm, it said they probably will range from 1 percent to 4.5 percent based on 2013 data—exceeding the maximum of 2.5 percent set under global rules.
The aggregate amount the eight banks need to meet the surcharges, above current levels is $21 billion, Federal Reserve officials said.
While stiffer rules can lower returns for shareholders of companies that hold onto profits to build capital, the Fed said that "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 U.S. regulations will focus in part on how much the banks borrow from institutional investors in short-term contracts, a form of funding deemed as 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 said. "Unfortunately, the surcharge formula developed by the Basel Committee does not directly take into account reliance on short-term wholesale funding."
U.S. Goes Its Own Way
In the wave of rules meant to prevent a repeat of the 2008 financial crisis, the Fed has made global agreements tougher when applying them to U.S. lenders. The eight U.S. firms covered by today'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.
"The U.S. once again chooses to go its own way and exceed international minimums," Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said before today's announcement. "If they squeeze the big banks too much, they'll force some out of some businesses."
A rule that targets firms that are more dependent on short-term funding from the markets could hurt New York-based Goldman Sachs and Morgan Stanley most. Such funding is about 35 percent of their liabilities, compared with about 20 percent for the others, according to data compiled by Keefe, Bruyette & Woods Inc.
Analysts including Citigroup's Keith Horowitz had predicted that the extra core-capital requirement could be as high as 4.5 percent of risk-weighted assets on top of the baseline 7 percent defined under rules known as Basel III.
That's higher than the 2.5 percent maximum to be levied on banks deemed globally significant in an annual list issued by the Financial Stability Board, which advises the Group of 20 nations on bank regulation. Less complex firms would be held to the baseline capital ratio of 7 percent set by the 27-nation Basel Committee on Banking Supervision.
JPMorgan had capital equal to 10 percent of its risk-weighted assets at the end of the third quarter, above the 9.5 percent minimum already recommended by the FSB. Citigroup had 11 percent, compared with the 9 percent minimum. Goldman Sachs had 10 percent and Morgan Stanley's capital stood at 12 percent, versus the 8.5 percent required for the pair under the global regime.
Among the eight U.S. banks on the FSB's list of globally significant firms, JPMorgan ranks as the most systemically important. It had the most short-term wholesale funding at the end of September, according to data compiled by KBW. Its $483 billion of short-term funds was followed by Citigroup's $432 billion and Bank of America's $407 billion.
A 1 percentage-point increase in JPMorgan's capital requirement would lower the firm's return on equity by about 1.1 points, KBW calculated in a report this week. Most banks could meet the requirement by holding onto a larger proportion of their earnings, KBW said.
–With assistance from Michael J. Moore in New York.
Dave Michaels
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