By Marcy Gordon, AP
WASHINGTON–Regulators are acting to require U.S. banks to build a sturdier financial base to lessen the risk that they could collapse and cause a global meltdown.
The eight biggest banks will have to meet stricter measures for holding capital — money that provides a cushion against unexpected losses — under a rule that regulators adopted Tuesday.
The Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury’s Office of the Comptroller of the Currency voted separately to require those banks to raise their minimum ratio of capital to loans to 5 percent from the current 3 percent.
The banks’ deposit-holding subsidiaries will have to achieve a ratio of 6 percent. The subsidiaries are subject to a stricter ratio requirement because the deposits are insured by the government.
The rule will not take effect until 2018. It applies to eight U.S. banks deemed so big and interconnected that each could threaten the global financial system: Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, Morgan Stanley, Bank of New York Mellon and State Street Bank.
The eight banks will have to add about US$68 billion in capital to their reserves to meet the 5 percent minimum requirement, government officials estimate.
The new requirements “will definitely make the biggest banks far stronger, but they will also make the financial system weaker,” said Karen Shaw Petrou, an analyst who heads Federal Financial Analytics in Washington. She said that’s because more lightly regulated financial firms outside the traditional banking industry hold an increasing proportion of assets, and the new rule means “still more risk will flow their way.”
The financial companies that collapsed or nearly fell in the 2008 meltdown, such as Lehman Brothers, American International Group and Fannie Mae and Freddie Mac, showed that threats to the global system can come from any big interconnected firm, not just banks, Petrou noted.
The regulators also are proposing to change how banks’ potential losses on investments are calculated in accordance with new international standards. Among other things, banks would have to calculate their investment holdings using daily averages. The proposal could lead to stricter accounting for some derivatives held by banks, the regulators said.
Derivatives are complex investments whose value is based on a commodity or security, such as oil, interest rates or currencies. Their use helped ignite the 2008 financial crisis.