Contact Us
Make My Homepage

Regulators Requiring Stronger Bank Capital

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.

stack of new 100-dollar bills
Mark Wilson/Getty Images

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 are adopting Tuesday.

The Federal Deposit Insurance Corp. and the Treasury’s Office of the Comptroller of the Currency voted to require those banks to raise their minimum ratio of capital to loans to 5 percent from the current 3 percent. The Federal Reserve will vote at a public meeting later Tuesday.

The banks’ deposit-holding subsidiaries will have to achieve a ratio of 6 percent. Because the deposits are insured by the government, the subsidiaries are subject to a stricter ratio requirement.

The rule won’t 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 regulators also are proposing to increase the amount and quality of capital that all U.S. banks must hold. Under the proposed rule that was opened to public comment, banks would need to maintain a level of high-quality capital equal to 5 percent of their loans and other assets.

That’s up from the current 4 percent requirement, which applies broadly to all capital reserves, not just to high-quality capital such as bank stock or retained earnings.

“The financial crisis showed that some financial companies had grown so large, (heavily indebted) and interconnected that their failure could pose a threat to overall financial stability,” Fed Chair Janet Yellen said in a statement before the Fed’s meeting. She said the action by regulators was a step “to address those risks.”

“This may be the most significant step we have taken to reduce the systemic risk” posed by the biggest banks, FDIC Chairman Martin Gruenberg said at the agency’s meeting.

Officials said banks have been building up their capital reserves and appear on the way to meeting the standards. All eight mega-banks are expected to meet the 5 percent minimum requirement by January 2018, they said.

Banks’ capital includes money that isn’t at risk, such as shareholders’ stakes. Equity includes the money banks receive when they issue stock, as well as profits they have retained.

The stricter capital requirements were mandated by Congress after the financial crisis, which struck in 2008 and ignited the worst economic downturn since the Great Depression. The rules also are in accordance with international standards agreed to after the crisis.

Hundreds of U.S. banks received federal bailouts during the financial crisis. The list included the nation’s largest financial firms, including all eight banks that will be subject to the rule adopted Tuesday.

Regulators say the goal is for banks to build buffers strong enough to withstand financial stress and avoid another crisis in which taxpayers would have to bail them out. Critics worry that the largest banks still represent a danger to the financial system.

The U.S. banking industry has been steadily recovering since the crisis. Overall profits have been rising, and banks have begun lending more freely.

The results of the Fed’s annual bank “stress tests,” announced last month, showed that the industry is better able to withstand a major economic downturn than at any time since the financial crisis. The Fed said only one of the 30 biggest banks in the country needed to take more steps to shore up its capital base.

Banks have lobbied to ease the requirements for higher capital, which they say could hamper their ability to lend.

© 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Learn more about our Privacy Policy and Terms of Use.

Best of the Web


Leave a Comment

It appears that you already have an account created within our VIP network of sites on . To keep your points and personal information safe, we need to verify that it's really you. To activate your account, please confirm your password. When you have confirmed your password, you will be able to log in through Facebook on both sites.

Forgot your password?

*Please note that your points, prizes and activities will not be shared between programs within our VIP network.

It appears that you already have an account on this site associated with . To connect your existing account with your Facebook account, just click on the account activation button below. You will maintain your existing profile and VIP program points. After you do this, you will be able to always log in to http://nj1015.com using your Facebook account.

*Please note that your points, prizes and activities will not be shared between programs within our VIP network.

Please fill out the information below to help us provide you a better experience.

Register on New Jersey 101.5 quickly by logging in with your Facebook account. It's just as secure, and no password to remember!

Not a Member? Sign Up Here

Register on New Jersey 101.5 quickly by logging in with your Facebook account. It's just as secure, and no password to remember!