A ‘too big to fail’ crackdown: U.S. regulators hit big banks with tougher standards


A Morgan Stanley building in New York's Times Square. Under a new regulation, the nation’s eight largest banks, including JPMorgan Chase and Morgan Stanley, would have to hold twice as much equity capital to absorb losses. (Mark Lennihan/AP)
July 9, 2013

Regulators told the country’s eight largest banks that they will have to raise billions of dollars to guard against future problems or reduce their size and complexity.

In a key step in the “too big to fail” debate, the top three banking regulators approved a proposal Tuesday that would force banks such as JPMorgan Chase, Goldman Sachs and Wells Fargo to hold far larger cash buffers than required by international standards.

The move is the latest effort to limit the threat big banks can pose to the financial system, nearly five years after their risky practices almost crippled the economy. Forcing banks to set aside more money could ensure that they remain solvent in times of financial distress and do not leave the government with the choice of funding a bailout or risking the fallout of a major bank failure.

Raising the amount of “equity capital” — stock, cash and other income — that big banks have to set aside has been a central theme in regulatory efforts to make the global banking system more resilient in times of financial upheaval.

The United States is taking a harder line on the issue than regulators overseas amid growing sentiment that the nation’s financial regulatory overhaul law has not gone far enough to prevent future taxpayer bailouts. Just last week, regulators laid out higher capital rules for all banks, but the new measure directly targets institutions with the most complex and risky operations.

Tuesday’s proposal calls for each of the eight largest banks — those with more than $700 billion of assets — to hold equity capital equal to 6 percent of its total assets. That is double the requirement set in the Basel III accord, an international agreement struck in 2010 by a committee of central bankers and regulators in Basel, Switzerland.

“It’s clear that the very largest banks can have an outsized impact on the entire system, so it makes sense to require that they calibrate their capital requirements more precisely and also hold higher levels of capital,” Thomas Curry, comptroller of the U.S. currency, said at a meeting on the proposal held at the Federal Deposit Insurance Corp.

Regulators estimated that banks would need to raise an additional $89 billion to meet the new threshold. Aside from raising capital, banks can meet the new standard by reducing their debt exposure. Banks will have until January 2018 to comply with the new rules once they are finalized.

Industry groups warn that the new capital regime could have a severe impact on the economy, with banks potentially reducing lending or exiting certain lines of business.

“We need to keep in mind that if the regulatory pendulum swings too far in the opposite direction it will stunt the American economy just as it is starting to improve,” said Rob Nichols, president and chief executive of the Financial Services Forum, a trade group that represents the largest banks.

Others, however, praised the capital proposal as a crucial step toward ensuring that banks can clean up their own messes.

“This is real, meaningful reform of the kind the public has a right to expect after suffering through the worst financial crisis since the Great Depression,” Sheila C. Bair, chairman of the Systemic Risk Council and former chairman of the FDIC, said in an e-mail.

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