Fed wants more capital held at largest US banks
SHARES of the largest US banks fell on September 26 after the Federal Reserve’s main regulator proposed higher capital requirements.
Stress tests for the banks – to see how they could ride out extreme crises – indicated that the largest eight so-called global systemically important banks (GSIB) need firmer capital buffers for systemic safety, Fed governor Daniel Tarullo said in a speech.
The Fed would soon formally propose a “stress capital buffer approach” to replace a previous capital strength surcharge on large banks, he added.
“This would generally result in a significant increase in capital requirements applicable to the GSIBs,” he said, adding that regional banks would see some terms in the stress tests eased.
The tougher standard is based on the view that “financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system,” he said.
“The surcharges are calibrated to force large banks to internalise the additional costs their distress would impose on the system.”
The eight include Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.
Shares for the group sank after the speech. JPMorgan lost 2.2 percent, Wells Fargo 1.9pc and Morgan Stanley 2.8pc.
The annual stress tests, implemented after the 2008 crisis, are used to determine if banks have adequate capital to handle a deep recession.
Banks that do not pass the tests can be denied permission to distribute profits to shareholders.