The nation’s top eight banks will be held to minimum capital holdings or face stiff surcharges, according to a decision made by the Federal Reserve on Monday.
The ruling establishes minimum holdings among what the Fed dubs “global systemically important banks,” or GSIBs, the firms with the most risk-based endeavors. These are the elite banks, which the Fed does not want to have to rescue the way it did during the 2009 bailouts. Monday’s ruling is designed to reduce the risk of banking bloat by encouraging the elite eight to reduce their risk profile and size.
The GSIBs, according to the Fed’s criteria are: Bank of America; Bank of New York Mellon; Citigroup; Goldman Sachs; JPMorgan Chase; Morgan Stanley; State Street; and Wells Fargo. JPMorgan Chase faces the largest potential surcharge of 4.5 percent of its risk-based capital. The remaining seven would face surcharges between 1 and 3.5 percent of each firm's total risk-weighted assets.
The GSIB surcharge will be phased in from January 1, 2016, until January 1, 2019, when it becomes fully effective.
Federal Reserve Chair Janet Yellen said that the decision is designed to implement accountability among the largest banks themselves ‒‒ to “bear the costs that their failure would impose on others," she said. GSIBs must “either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system,” she said.
Monday’s ruling has shades of the Fed’s ruling last December requiring two systematically sound ways of calculating surcharges and then using the higher of the two. This, according to the Fed, is aimed at reducing the reliance on short-term wholesale funding, which “left firms vulnerable to runs and fire sales” during the crisis, the report states.
Reserve Board Governor Daniel Tarullo said the ruling is an important bolster to the financial framework the Obama administration has built-in the wake of the recession and that the new rules “reflect the relatively new, but very significant, principle that the stringency of prudential standards should vary with the systemic importance of regulated firms."