Monday, July 20, 2015 6.24 PM / WSJ
The Federal Reserve is set to finalize the amount of additional capital the nation’s eight biggest banks must maintain, with J.P. Morgan Chase & Co. facing the highest capital increase of the group, a policy designed to encourage firms to reduce their size or risk profile.
J.P. Morgan would face a capital “surcharge” of 4.5% of its risk-weighted assets under the final rule. The other seven firms must maintain an additional capital buffer of between 1% and 3.5%.
J.P. Morgan has made some strides in raising the equity needed to meet the new requirement, Fed officials indicated, saying the bank is about $12.5 billion shy of the surcharge, which takes full effect in 2019. In December, Fed governor Stanley Fischer, in an apparent slip, disclosed that J.P. Morgan was about $21 billion short.
The other banks currently have enough capital to meet the requirement, the officials said.
The size of each bank’s additional capital requirement is tailored to the firm’s relative riskiness, as measured by a formula created by international regulators and the Fed. A bank’s surcharge can grow or shrink depending on changes such as size, complexity and entanglements with other big firms.
The Fed Board of Governors is slated to formally adopt the final rule at an open meeting this afternoon.
The Fed unveiled the details of the final rule, first introduced last December, nearly five years to the day since President Barack Obama signed the Dodd-Frank financial overhaul into law. In keeping with the spirit of that legislation, Fed officials say the capital requirement is designed to encourage the biggest banks to shrink and take other steps to reduce the threat their potential failure poses to the financial system.
“A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others,” Fed Chairwoman Janet Yellen said in a written statement prepared for this afternoon’s open meeting. “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.”
Banks would have to meet this additional capital requirement with common equity, considered the highest form of regulatory capital because it can directly absorb losses. The new surcharge requirement comes on top of a base 7% common-equity capital requirement that most banks face.
The surcharge gives big banks a choice. They can fund their operations with less borrowed money and hold more common equity, which can crimp returns. Or, they can reduce the size of this new surcharge by shrinking or making other changes such as cutting their reliance on short-term funding sources that can be volatile.
Among the other banks: Citigroup Inc. faces a 3.5% surcharge; Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley face 3%; Wells Fargo & Co. 2%; State Street Corp. 1.5%; and Bank of New York Mellon Corp. 1%.