Tags: Financial | Overhaul | Banks | Capital

Fed Wants Banks to Keep Bigger Financial Cushion in Line With Global Standards

Thursday, 07 Jun 2012 04:46 PM

The Federal Reserve wants U.S. banks to set aside more money to cushion against unexpected losses, a key step in preventing another financial crisis.

The Fed governors voted 7-0 on Thursday to propose rules requiring all banks hold at least 7 percent of their assets in capital reserves. That's up from a minimum of 2 percent currently required and in line with international standards.

The rules are open to comment until September. They will be finalized after that. But some banks won't have to meet the requirements until 2019. That's because the rules have to be coordinated with international standards that are being phased in over the next seven years.

The capital requirements for banks were mandated under the 2010 financial overhaul.

The banks have lobbied vigorously against the proposals. They say setting aside so much money in reserve could limit what they could lend.

Experts say most big banks already have increased their capital levels close to the stricter levels.

Capital "acts as a financial cushion to absorb firm losses while reducing the incentive" for the firm to take risks, Fed Chairman Ben Bernanke said at the meeting.

Fed Gov. Daniel Tarullo said Wednesday the JPMorgan's $2 billion-plus trading loss is a good example of why the rules are needed. He said JPMorgan was able to weather the loss because it had sufficient reserves to cushion against the loss.

"A bank with a strong capital position can absorb losses from unexpected sources," Tarullo said at the Fed meeting.

The Fed also finalized additional capital requirements for banks that hold at least $1 billion in assets such as complex financial derivatives that they trade with other banks.

The additional amounts that banks will have to set aside will follow formulas that will vary for each bank. Banks in this category include JPMorgan, Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc.

Banks have argued that being forced to hold too much capital would hamper their ability to make loans. A leading opponent of the international standards, known as the Basel III accords, was JPMorgan CEO Jamie Dimon.

Dimon pressed Fed Chairman Ben Bernanke in a public forum last year, asking if regulators had gone too far and might be slowing down the economic recovery. Last September, Dimon called the Basel standards "anti-American."

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Thursday, 07 Jun 2012 04:46 PM
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