The Federal Reserve is planning to hit the largest banks in the United States with an expensive new requirement that is meant to diminish the threat that some financial institutions still face as being “too big to fail,” even six years after the economic collapse.
According to testimony prepared for a hearing of the Senate Banking Committee on Tuesday, Fed Governor Daniel Tarullo informed lawmakers that it will introduce a capital surcharge which will prompt the big banks to maintain a wider cushion of capital in order to protect against possible losses. The U.S. central bank’s version of the capital surcharge will be greater than agreed upon by international regulators.
Furthermore, the Fed will reprimand domestic banks that immensely depend on unstable forms of short-term funding, like overnight loans, in deciding the size of a new capital surcharge. It remains unclear as to how much additional capital banks will need to have in order to make them safer through self-funding.
There have been estimations that the capital surcharge could be 2.5 percent of risk-weighted assets higher than agreed to by global regulators.
“You know, if the firm really thinks … that it has to be this big and this complicated to engage in a certain set of activities or to have a certain-sized balance sheet, then it can do so, but it has to have very high levels of capital,” Tarullo told the U.S. Senate Banking Committee. “If, on the other hand, those highest levels of capital appear to not be worth it, then it has the option of changing what people have called its systemic footprint.”
Since the central bank is ordering U.S. financial firms to enhance their capital cushions that would be larger than their global rivals, many have asked if the central bank and federal government are protecting these banks or perhaps placing them at a competitive disadvantage on the world stage.
However, it should be noted that banks have already been increasing their capital since the Great Recession. According to Federal Financial Analytics data reported by the Wall Street Journal, six U.S. banks have boosted their capital by more than $29 billion between the years 2007 and 2013.
Nevertheless, financial analysts say this bold measure is a signal that the central and banking regulators will remain tough even six years after the financial meltdown that prompted officials to launch bailout packages and stimulus measures.
“The evidence on your screen is the market is telling you it’s one thing for (Fed Chair) Janet Yellen to mention something in passing. It’s another for Governor Tarullo… to say, ‘We are working on this and this is what we are going to do,'” said David Hilder, an analyst with Drexel Hamilton, in an interview with Reuters.
Democratic and Republican Senators, including Elizabeth Warren, Bob Corker and Sherrod Brown, concur that the matter of “too big to fail” is a bipartisan issue that needs to be addressed by both sides of the aisle. As USA Today’s Darrell Delamaide wrote: “big banks need to run for cover.”
