Risk Management

Big Banks Face $120B Shortfall Under Fed Rule

The Fed's proposed rule on big banks' “total loss absorbing capacity” is part of the new regime designed to avert a "too big to fail" scenario.
Katie Kuehner-HebertNovember 2, 2015

Six of the biggest U.S. banks need to raise an additional $120 billion to comply with a Federal Reserve proposal designed to reduce the threat of another meltdown in the financial system.

The Fed’s proposed rule on “total loss absorbing capacity” (TLAC) requires banks to carry a minimum amount of capital and liabilities — equal to 18% of risk-weighted assets — that can be written off when a bank gets into serious trouble.

“The proposal, 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 Friday.

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“This is an important step toward ending the market perception that any banking firm is ‘too big to fail,’” she added.

The rule would cover eight institutions designated as globally systemically important banks — JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, and Wells Fargo

According to a Fed memo, six of the GSIBs have TLAC shortfalls amounting to a combined $120 billion. The central bank did not name those banks but estimated that compliance with the proposal would increase each bank’s annual funding costs by between $680 million and $1.5 billion.

The banks are expected to meet the $120 billion shortfall by issuing debt, which is usually more cost-effective than issuing equity. But a senior Fed official told The Financial Times  the banks “don’t need to go out and raise massive quantities of new debt,” because they could meet the standards by, for example, shifting debt from subsidiaries to parent companies or moving soon-to-mature debt to longer maturities.

The TLAC proposal is part of a global regime established by the Financial Stability Board, a group of regulators appointed by the G20 countries.

“We’ve already seen higher capital requirements generally, and additional buffers for GSIBs,” John Simonson, a partner at PwC, told The Financial Times. “This is another layer to protect the banking system from potential failures, so it is an important step.”

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