Fed directs big banks to hold US$200b extra capital

Federal regulators are directing the eight biggest US banks to hold capital at levels above industry requirements to cushion against unexpected losses and reduce the chances of future taxpayer bailouts.

The US Federal Reserve's action Monday means the eight banks together will be required to shore up their financial bases with about US$200 billion in additional capital.

The requirements also are aimed at encouraging the Wall Street mega-banks to shrink so they pose less risk to the financial system. The banks include JPMorgan Chase, Citigroup and Bank of America.

Most of the banks have already put away the additional capital. JPMorgan is the only one that doesn't already meet the requirements, which will be phased in from 2016 through 2018 and take full effect on January 1, 2019. It currently falls about US$12.5 billion short, according to Fed officials.

The Fed governors led by Chair Janet Yellen voted 5-0 at a public meeting to impose the so-called "capital surcharges" on the eight banks.

The extra capital requirements will increase in proportion to how risky the regulators deem a bank to be. A key risk factor will be how much a bank relies on short-term funding markets to borrow from other banks. Those markets seized up during the 2008 financial crisis.

The government stepped in during the crisis with hundreds of billions of dollars in bailouts of the big Wall Street banks as well as hundreds of smaller US banks.

In recent years, the Fed and other regulators have put into effect a series of rules for banks to increase their capital buffers, as required by the 2010 financial overhaul law. The new additional layer of requirements for the biggest banks also exceeds the levels mandated by international regulators.

Banking industry groups say the Fed requirements could limit access to loans for businesses and consumers, by reducing the amounts that banks would have available to lend.

The other banks subject to the capital requirements are Goldman Sachs, Wells Fargo, Morgan Stanley, Bank of New York Mellon and State Street Bank.

JPMorgan, the largest US bank by assets, has the stiffest capital surcharge at 4.5 per cent of its assets. It's followed by Citigroup at 3.5 per cent; Bank of America, Goldman Sachs and Morgan Stanley at 3 per cent; Wells Fargo at 2 per cent; State Street at 1.5 per cent and Bank of New York Mellon at 1 per cent.

Officials of New York-based JPMorgan have said the bank will do whatever is needed to meet the capital requirements.

Stricter capital requirements for banks were mandated by Congress after the financial crisis, which struck in the fall of 2008 and ignited the worst economic downturn since the Great Depression.