The new rules will apply to all banks that have $50 billion or more in assets, and there are even more stringent restrictions on banks that have more than $500 billion in assets. International banking regulators already reached an agreement that would require the biggest global banks to hold a capital surcharge of as much as 2.5% of common equity on their balance sheets by the year 2019. That agreement replaced the existing Basel III requirement that required global banks to hold common equity capital of 7% of their assets, also by the year 2019. Now the Federal Reserve says it supports implementing a capital surcharge for the largest banks based on the Basel framework and that it would issue a proposal on the subject without giving any details about when the measure would be introduced.
The Basel III requirement identified the eight largest U.S. banks that would definitely be subject to hold between 1% and 2.5% in extra capital as the Bank of America Corp., Citigroup Inc., Bank of New York Mellon Corp., Goldman Sachs, J.P. Morgan Chase & CO., Morgan Stanley, State Street and Wells Fargo & Co. Federal Reserve officials declined to say whether other banks beyond those eight that have $50 billion or more in assets would also be subject to surcharges, but the Fed did say that if additional banks were affected, the surcharge would probably be more modest.
The Federal Reserve said it is motivated to limit a problem of overly interconnected big banks by seeking to prevent them from having credit exposure to other institutions that would exceed 25% of their capital stock. The new regulations also set stricter limits on bank transactions with each other by prohibiting a bank with more than $500 billion in assets from having a credit exposure of more than 10% with another bank that also has more than $500 billion in assets. The Federal Reserve’s proposal will also implement another section of the Dodd-Frank Act that requires the central bank to limit a financial institution’s leverage ratio to 15-to-1 if it decides the firm poses a risk to the overall financial system.
Banks and anyone else interested can comment on the new Federal Reserve proposal until March 31 of 2012, although most of the regulations are expected to take effect one year after they are adopted, the agency would not say when they would adopt all of the rules because there are already many different effective dates set for the different provisions in the rules right now.
