New regulations by the Fed

The Federal Reserve has recently approved rules to amend the existing capital plan as well as stress testing guidelines. These will be effective in 2016. Federal Reserve governor Daniel Tarullo said there’s “more than a pretty good chance” that banks will face “some net increase in the post-stress minimum requirements.”

Tarullo heads the Fed’s supervisory committee. In an interview with Bloomberg, he mentioned that banks (XLF) will be subject to higher minimum capital levels to clear their stress tests than was required earlier. This means large banks that are deemed “too big to fail” will face higher capital requirements to clear the annual stress tests. Some of these banks include the following:

  • Bank of America (BAC)
  • J.P. Morgan (JPM)
  • Bank of New York Mellon (BK)
  • Citigroup (C)

Fed Approves New Rules: Higher Capital Punishment for US Banks?

Banks will need to maintain higher capital levels

Banks will thus need to retain higher capital in order to be able to pay dividends to its shareholders. These annual stress tests are meant to reaffirm that these large banks are sufficiently capitalized to be able to withstand another financial crisis similar to the one in 2008. The annual stress test process consists of two steps.

  1. Comprehensive Capital Analysis and Review (or CCAR)
  2. Dodd-Frank Annual Stress Test

In the next part of this series, we’ll dive more deeply into these regulations and their impact on US banks.

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