Politics & MoneyInvestmentsMortgage

Fed proposes new bailout rules for biggest banks

Would be required to carry $120 billion in debt to reduce taxpayer burden

Eight of the country’s largest banks would be required to raise $120 billion to comply with a new rule proposed Friday by the Federal Reserve Board, with the money designated to recapitalize the bank should it fail, lessening the likelihood of a a government bailout.

Under the proposed rule, JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), State Street (STT), and Bank of New York Mellon (BK) would be required to meet a new long-term requirement and a new “total loss-absorbing capacity.”

According to the Fed, the new requirements would “bolster financial stability by improving the ability of banks covered by the rule to withstand financial stress and failure without imposing losses on taxpayers.”

The eight banks are identified by the Fed as “global systemically important banks,” and the new rules would reduce the “systemic impact” of the potential failure of one of those banks.

"The long-term debt requirement we are proposing today, combined with our other work to improve the resolvability of systemic banking firms, would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms," Fed Chair Janet Yellen said. "This is an important step toward ending the market perception that any banking firm is ‘too big to fail.'"

According to the Fed, the new rule would allow for an orderly resolution process should one of the eight bank’s fail.

Under the rule, the proposed long-term debt requirement would set a minimum level of long-term debt that could be used to recapitalize these firms' critical operations upon failure.

The complementary total loss-absorbing capacity requirement would set a new minimum level of total loss-absorbing capacity, which can be met with both regulatory capital and long-term debt, the Fed stated.

The Fed also said that these requirements will improve the prospects for the orderly resolution of a failed domestic GSIB and will strengthen the resiliency of all GSIB.

The rule would allow the bank’s investors to suffer losses, while the critical operations of the firm continue to function. “Requiring GSIBs to hold sufficient amounts of long-term debt, which can be converted to equity during resolution, would facilitate this by providing a source of private capital to support the firms' critical operations during resolution,” the Fed stated.

According to the Fed, domestic GSIBs would be required to hold at a minimum:

  • A long-term debt amount of the greater of 6% plus its GSIB surcharge of risk-weighted assets and 4.5% of total leverage exposure
  • A TLAC amount of the greater of 18% of risk-weighted assets and 9.5% of total leverage exposure

Click here to see the proposed requirements for each bank.

"By increasing required loss-absorbing capacity by 60% or more, the long-term debt requirement will bring us closer to the goal of ensuring that even one of the nation's largest banks could fail without either endangering the financial system or prompting a government bailout," Fed Governor Daniel Tarullo said.

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