By Michael R. Crittenden
WASHINGTON--The Federal Reserve on Tuesday outlined a
multipronged plan to place the nation's largest banks under
increasingly stringent capital requirements to guard the financial
system from risks posed by "too big to fail" companies.
Fed officials said they hope to act in the coming months on four
separate proposals aimed at the eight largest U.S. firms considered
"systemically important" to the global economy, including Goldman
Sachs Group Inc. (GS), Bank of America Corp. (BAC) and J.P. Morgan
Chase & Co. (JPM).
Fed Gov. Daniel Tarullo, the agency's point man on regulation,
said regulators could soon propose a higher leverage ratio, which
is expected to fall between 5% and 6%, for the largest banks. This
capital measure gauges equity against total assets and is favored
by some regulators as a better measure of a bank's ability to
withstand stress.
Regulators are also working on a requirement these banks hold a
minimum amount of long-term debt, a separate charge based on a
firm's reliance on volatile forms of short-term funding, and a
special surcharge agreed upon by international regulators.
Fed officials, led by Mr. Tarullo, have been increasingly more
explicit that they want to compel these firms to reduce their size
and complexity. The Fed has avoided setting a hard cap on the size
of banks, instead favoring an approach that makes it progressively
more costly and painful to be a large, complex bank. Officials hope
this gives these firms the incentive to reduce the risk they pose
to the broader economy.
The other five banks considered globally systemic are Citigroup
Inc. (C), State Street Corp.(STT), Bank of New York Mellon Corp.
(BK), Wells Fargo & Co. (WFC) and Morgan Stanley (MS).
The outline came as the Fed separately finished work Tuesday on
a plan to require all banks, not just the biggest lenders, to put
in place tougher capital rules to bolster the resiliency of banks
during times of stress. Fed officials voted unanimously in favor of
those final rules, required as part of an international agreement
to bolster bank buffers. Other regulatory agencies are expected to
vote on them next week.
The final rule draws a distinct split between the largest Wall
Street firms and small to midsize lenders, underscoring the concern
regulators still have about the risks posed by large, complex banks
five years after the financial crisis. Regulators moved to address
some of the concerns expressed by smaller banks--including how they
weigh the risks posed by residential mortgages.
"Adoption of these rules assures that, as memories of the crisis
fade, efforts to build and maintain higher capital levels will not
be allowed to wane," Mr. Tarullo said.
The move by regulators to finalize capital rules for banks will
allow the U.S. to fall in line with the international agreement
agreed to by regulators several years ago, known as Basel III
because of where regulators met to reach the accord. The new
framework seeks to require all banks to build up capital
buffers.
The final rule maintains the proposal that all banks should
maintain a level of common equity equal to 4.5% of their
risk-weighted assets, a tier-1 capital ratio of 6%, and a total
capital ratio of 8% of risk-weighted assets.
Among the changes regulators made, in part because of aggressive
lobbying from smaller banks and their supporters, would be to allow
smaller banks with certain trust-preferred securities to count
those securities toward capital requirements. Additionally, small
and midsize banks would be able to opt out of a requirement to
count certain types of comprehensive income out of capital
calculations.
In a key change, the Fed also abandoned a plan to adjust the
risk weighting for residential mortgages. The proposal had come
under heavy fire from industry participants who said it could
discourage mortgage lending at a time when U.S. officials have
broadly said they want to encourage the health of the housing
market.
Fed staff said they were moving away from the proposed mortgage
risk-weights because of recent changes to mortgage underwriting
standards by U.S. regulators, as well as concerns about the
potential effect of pending mortgage-related rules.
Write to Michael R. Crittenden at
Michael.Crittenden@dowjones.com