Under Fed’s new proposal, big U.S. banks posing systematic threat to the financial system will be required to implement a risk-based capital surcharge unless they decide to shrink their size to a particular level. The eight largest U.S. banks would need to have an additional capital buffer (between 1% and 4.5% of their risk-weighted assets) depending on the relative threat a bank poses to the financial system.
Under current Basel III rules, banks have to increase their core tier-one capital ratio to 4.5% and carry an added capital conservation buffer of 2.5%, which raises the total common equity requirements to 7%. Any bank that fails to meet the requirements would be barred from paying dividends to shareholders. Similar to the Basel approach, the Fed’s proposal adds an additional “surcharge” to that 7 percent requirement based on a bank’s size and the nature of its activities. The biggest impact will be felt by J.P. Morgan Chase & Co., the nation’s largest bank by assets, which is $21 billion short of the requirement, according to Fed officials. Fed officials did not provide any further information on what surcharge other large banks might have to pay.
What does this mean for consumers? If the large banks absorb the higher regulatory costs, investors will be unhappy because of lower expected profits. More likely outcome is that these banks would pass on some of the added costs to their customers, which means consumers might be partially financing large banks to remain large. One solution is to consider smaller regional banks which are able to avoid these surcharges.
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