8 banks to shift loss bur­den to in­vestors

The Denver Post - - BUSINESS - By Marcy Gordon

The eight big­gest U.S. banks will be re­quired to build new cush­ions against losses that would shift the bur­den to in­vestors. The ac­tion by the Fed­eral Re­serve was the lat­est bid by reg­u­la­tors to re­duce the chances of fu­ture tax­payer bailouts.

The Fed gov­er­nors led by Chair Janet Yellen voted 5-0 on Thurs­day to lay down the new re­quire­ments. The mega-banks must bulk up their ca­pac­ity to absorb fi­nan­cial shocks by is­su­ing eq­uity or long-term debt equal to cer­tain por­tions of to­tal bank as­sets. The idea is that the cost of a huge bank’s fail­ure would fall on in­vestors in the bank, not on tax­pay­ers.

The Fed ac­tion comes as Wash­ing­ton braces for changes to the 2010 law that reined in Wall Street af­ter the fi­nan­cial cri­sis and the Great Re­ces­sion. Pres­i­den­t­elect Don­ald Trump urged dur­ing his campaign that the Dodd-Frank law be dis­man­tled, and his tran­si­tion team has set that as a goal. Repub­li­cans, who over­whelm­ingly op­posed Dodd-Frank, will con­trol the White House and Congress in Jan­uary and see an open­ing to go af­ter key parts of the law — such as the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau.

“To­day we are putting into place one of the last crit­i­cal safe­guards that make up the core of our … re­form ef­forts” fol­low­ing the fi­nan­cial cri­sis, Yellen said at the start of the meet­ing. “These banks must bear the costs their fail­ure would im­pose on the fi­nan­cial sys­tem and the econ­omy.”

The Fed gov­er­nors im­posed the so-called “loss­ab­sorb­ing ca­pac­ity” re­quire­ments on the eight banks: JPMor­gan Chase, Bank of Amer­ica, Cit­i­group, Wells Fargo, Gold­man Sachs, Mor­gan Stan­ley, Bank of New York Mel­lon and State Street Bank.

They would have to is­sue a to­tal of about $70 bil­lion in new eq­uity and longterm debt to meet the re­quire­ments, the Fed staff es­ti­mates. Four of the eight banks, which weren’t named, are es­ti­mated to have short­falls.

Still, most of the re­quire­ments won’t take ef­fect un­til 2019, and the re­main­der not un­til 2022.

“We’re go­ing to start look­ing at rolling back (rules) be­fore we’ve started im­ple­ment­ing,” said Oliver Ire­land, an at­tor­ney spe­cial­iz­ing in bank­ing law at Mor­ri­son & Fo­er­ster who was an as­so­ciate gen­eral coun­sel at the Fed.

With the new “loss-ab­sorb­ing” re­quire­ments, Ire­land notes, in­vestors will know that if a bank fails, they’ll be on the hook and likely won’t re­cover the full amount they put in. Higher in­ter­est rates paid by banks on the debt they is­sued be­fore­hand would com­pen­sate for the in­vestors’ risk.

The new cush­ions come atop rules pre­vi­ously adopted by the Fed for the eight banks to shore up their fi­nan­cial bases with about $200 bil­lion in ad­di­tional cap­i­tal — over and above cap­i­tal re­quire­ments for the in­dus­try. And they’re in ad­di­tion to 2014 rules di­rect­ing all large U.S. banks to keep enough high­qual­ity as­sets on hand to sur­vive dur­ing a se­vere down­turn.

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