The eight largest American banks will need to raise an additional $120 billion following a new rule from the Federal Reserve.
People invested in one of the country’s largest financial institutions probably won’t be too thrilled with the latest from the Fed. The Federal Reserve decided to leave interest rates unchanged on Wednesday, and this could spell disaster for investors. According to a report from Business Insider, the Fed’s proposed rule would establish a total loss-absorbing capacity and long-term debt requirements for major U.S. banks. It would also set margin and capital requirements for uncleared swaps of prudentially regulated entities.
The Fed proposed that the eight largest American banks should build new buffers against massive losses that would fall on the shoulders of investors. The new rule hopes to prevent the need for future bank bailouts funded by American taxpayers.
Now, megabanks may have to raise up to $120 billion in additional reserves to help buffer against future market shocks. They could do so by issuing equity or long-term debt commensurate with determined percentages of their total assets. That way, in the case of another financial crisis, the banks would be equipped to deal with the fallout without the help of taxpayers.
Janet Yellen, the head of the Federal Reserve proposed the loss-absorbing capacity rule with a 5-0 vote at a public meeting on Friday, which would extend to some of the country’s largest financial institutions including JP Morgan Chase, Citigroup, and Bank of America. Altogether, it would cost the country’s biggest banks roughly $120 billion to fulfill the requirements set forth in the new Fed rule.
The rules wouldn’t go into effect until 2019, and some wouldn’t even go into effect until 2022. The new rules follow an additional set of requirements from the Fed this July for the eight biggest banks to gather $200 billion in additional capital, in excess of industry capital requirements. All of these rules fall on the back of a set of 2014 regulations that required banks to have enough high-value assets on hand at all times in the event of a financial crisis.
The recent proposal adds on to these regulations to help ensure that American taxpayers won’t be forced to foot the bill of another massive bailout. Yellen said the new rules would substantially reduce this risk, leaving the banks to deal with their own failures should they occur.
Following the 2008 financial crisis, Congress passed legislation requiring stricter capital requirements for the banks that were hit the hardest. Hundreds of financial institutions accepted money funded by taxpayers that totaled in the hundreds of billions of dollars, spawning the phrase “too big to fail” to describe these behemoth banks.
Capital and liquidity rules are supposed to provide guidelines for banks to accurately reflect the risk they are taking on when they invest in various areas. If capital requirements are a “belt” keeping banks in check, says Morrison & Foerster attorney Oliver Ireland, then the new Federal Reserve rules are like suspenders, preventing the American taxpayer from footing the bill should the belt fail anyway.
Investors will have less incentive to turn a blind eye toward risky lending practices like the ones that precipitated the 2008 financial crisis if they will be forced to pay for the aftermath. Other financial institutions subject to the new rules include Goldman Sachs, Wells Fargo, Morgan Stanley, Bank of New York Mellon, and State Street Bank.
A press release outlining the details of the new rule can be found here.
