Fed Hands Big Banks New Risk-Based Capital Surcharges

The Board of Governors of the Federal Reserve has issued a final rule that establishes risk-based capital surcharges for financial institutions designated as a “global systemically important bank holding company (GSIB).”

The rule, finalized on Monday afternoon, affects eight of the nation’s largest banks. JPMorgan was handed the largest surcharge, 4.5 percent of its risk-weighted assets. Other banks on the list include Citigroup (a 3.5 percent surcharge); Bank of America (3 percent); Goldman Sachs (3 percent); Morgan Stanley (3 percent); Wells Fargo (2 percent); State Street (1.5 percent); and Bank of New York Mellon (1 percent).

The percentages were determined using formula the Fed first revealed in December 2014, and incorporating a Basel Committee on Banking Supervision framework that considers a GSIB's size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity.

The inherent ultimatum of the rule: banks can either pony up the additional capital, or reduce the financial burden by reducing their size, complexity, risk profile, or reliance on short-term borrowing.

 “A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others,” Fed Chairwoman Janet Yellen said in a statement. “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 would do to our financial system.”

The surcharges will be phased in beginning on Jan. 1, 2016, becoming fully effective on Jan. 1, 2019.

The Financial Services Roundtable, an advocacy group for the financial services industry, is among the critics of the new surcharges. “The rule requires U.S. firms to hold higher amounts of capital than international competitors, putting America at an economic disadvantage and limiting lending,” it said in a statement. “The Fed has also not been transparent regarding how they calculated the new capital requirement and provided only limited information to the firms covered by it.”

In a separate matter, the Federal Reserve on Monday also issued a final order that establishes enhanced prudential standards for General Electric Capital Corporation (GECC), a nonbank financial company designated by the Financial Stability Oversight Council for supervision as a systemically important entity.

General Electric, the parent company of GECC, is undergoing a process to “shrink its systemic footprint and retain only those business lines that support GE's core industrial businesses,” a statement from the Fed says. The final order provides for application of enhanced prudential standards in two phases, both of which address capital requirements; capital-planning and stress-testing requirements; liquidity requirements; and risk-management and risk-committee requirements.

Effective Jan. 1, 2016, GECC must comply with risk-based and leverage capital requirements, the liquidity coverage ratio rule, and related reporting requirements. If it is still designated by the FSOC prior to January 1, 2018, GECC would be required to comply with liquidity risk-management, general risk-management, capital-planning, and stress-testing requirements, as well as restrictions on inter-company transactions.