Washington: The U.S. Federal Reserve on Tuesday proposed requiring eight of the largest U.S. banks to hold an extra capital cushion, and said the firms will need even more equity if they rely heavily on short-term wholesale funding.
Most of the banks, which include JPMorgan Chase and Goldman Sachs, would be held to higher capital requirements under the Fed`s proposal than under a similar rule by global regulators, officials said.
Almost all of the eight banks already have raised enough equity to meet the proposed requirements, the Fed said.
Regulators want the biggest U.S. banks, those whose failure could threaten financial markets, to rely more on equity and less on borrowing to fund their activities. Officials also want to discourage banks from relying on riskier forms of debt.
"Reliance on short-term wholesale funding can leave a firm vulnerable to creditor runs that force the firm to rapidly liquidate its own positions or call in short-term loans to clients," Fed Governor Daniel Tarullo said.
Fed officials estimated U.S. banks would face a surcharge of between 1 and 4.5 percent of risk-weighted assets.
The requirements are part of a global agreement known as Basel III to make banks safer after the 2007-2009 financial crisis. Regulators have established several new capital measures, including surcharges of between 1 and 3.5 percent of risk-weighted assets that apply only to the biggest banks.
The charges vary depending on banks` size, complexity and other risk factors.
The Fed is now implementing the surcharge for the U.S. banks it regulates, with some adjustments. Under Tuesday`s proposal, the eight banks would calculate their surcharges under the Basel method, as well as a separate score that weighs their reliance on short-term wholesale funding.
The banks will have to follow whichever formula yields a higher surcharge. The Fed estimated that U.S. banks` surcharge will be, on average, about 1.8 times its Basel requirement.
Several other countries, including Switzerland and Sweden, have also imposed surcharges higher than Basel required.
Fed officials did not disclose the exact surcharge amounts but said banks that rely heavily on short-term funding will need the biggest buffers. Investment banks, such as Goldman Sachs and Morgan Stanley, often use such funding sources.
The proposed surcharge will be phased in beginning in 2016. Banks will be allowed to submit comments on the proposal before the Fed makes it final.
