Fed forces a capital buffer for big banks

Eight of the nation’s largest banks must hold more capital to reduce the risk of their failure and its effects on the broader financial system under a new rule approved by the Federal Reserve on Monday.

The “risk- based capital surcharge” would apply to banks with at least $ 250 billion in total assets, or at least $ 10 billion in foreign exposure, that rely heavily on short- term wholesale funding, including overnight loans. Such loans are vulnerable to runs.

The surcharge would range from 1% to 4.5% and would be in addition to the 7% capital buffer required for large banks under the Basel III rules. The cushion could lower returns for shareholders by hindering the banks’ ability to buy back stock or pay higher dividends.

The banks in aggregate would have to keep an additional $ 200 billion in capital, as the Fed continues to take steps to safeguard the banking system seven years after the financial crisis.

As an alternative, the banks could shrink in size to minimize the fallout of their potential failure on the financial system.

The surcharge will be phased in from Jan. 1, 2016, to Jan. 1, 2019. Currently, all of the eight banks meet the capital requirement or are on track to do so, except J. P. Morgan Chase, which falls short by $ 12.5 billion.

The eight banks affected and estimated surcharges: J. P. Morgan Chase, 4.5%; Citigroup, 3.5%; Goldman Sachs, 3%; Morgan Stanley, 3%; Wells Fargo, 2%; State Street Corp., 1.5%; the Bank of New York Mellon Corp., 1%.

“In practice, this final rule will confront these firms with a choice: They 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 was due to our financial system,” Yellen said at a Fed board meeting.

Separately, the Fed approved tougher rules for General Electric Capital Corp., the company’s lending and leading unit, that would regulate it as a bank. Starting next January, the company must comply with some capital, liquidity and reporting requirements. By Jan. 1, 2018, it must follow other rules, including undergoing Fed stress tests.