Federal Reserve Finalizes GISB Capital Surcharge

July 21st, 2015

Yesterday, the Federal Reserve finalized its capital holding requirements rule for the largest systemically important US bank holding companies. Eight major banks will now be required to hold greater capital buffers, totaling to around $200 billion. The covered entities include Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase, Wells Fargo, Bank of America, State Street and Bank of New York Mellon, who have now been designated globally systemically important banks (GSIB).  General Electric’s finance unit is notably absent from the group.

In a statement, Federal Reserve Board Governor Daniel Tarullo said, “A set of graduated capital surcharges for the nation’s most systemically important financial institutions will be an especially important part of the strengthened regulatory framework we have constructed since the financial crisis. Like the higher leverage ratio requirements we will apply to these firms, they reflect the relatively new, but very significant, principle that the stringency of prudential standards should vary with the systemic importance of regulated firms.”

Federal Reserve Chair Janet Yellen said, “A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others. In practice, this final rule will confront these firms with a choice: 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. Either outcome would enhance financial stability.”

JP Morgan will be hardest hit by the new rules. To comply with the capital requirements, the largest bank out of the group of eight will experience a more than $12 billion shortfall.  JP Morgan’s minimum capital holding requirement will increase by 4.5 percent. Conversely, the other seven banks are estimated to have sufficient capital to meet the requirements.

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