Banks face shortfall of $120 billion after Fed’s new rule
On Friday, November 27, 2015, the Federal Reserve approved a new regulatory requirement that requires six of the eight globally systematically important banks (or GSIBs) (KBE) to raise up to $120 billion of capital. This rule aims to amend the Fed’s existing rules dealing with Total Loss Absorbing Capability (or TLAC), a rule that aims to reduce risks in the banking system.
J.P. Morgan (JPM), with assets of $2 billion and also the largest bank in the United States, will be facing the most stringent requirements. Next will be Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS). Wells Fargo, State Street, and Bank of New York Mellon are also included in the list of banks.
These banks are expected to meet this $120 billion shortfall by raising debt rather than fresh equity, which is more cost-effective. These regulations are aimed at ensuring that these “too big to fail” banks are able to recapitalize without disrupting financial markets or without a government bailout. “By making the failure of even the largest banks more manageable, the proposed regulation will be another important step in solving the too-big-to-fail problem,” said Fed governor Daniel Tarullo in a statement last week. The rule is also applicable to US operations of foreign GSIBs.
In the next part, we’ll look at how these rules have already affected banks.