As part of its effort to avoid “too big to fail” scenarios, the U.S. Federal Reserve has proposed levying risk-based capital surcharges on the eight largest U.S. banks, surcharges that go beyond the requirements of Basel III.
Under the Fed’s proposal, a firm identified as a global systemically important bank would be subject to a surcharge ranging from 1.0% to 4.5% of its total risk-weighted assets. The maximum surcharge set under the global Basel III rules is 2.5%.
According to Fortune, JPMorgan Chase likely will bear the brunt of the new rule. The bank had about $163 billion in top-quality capital, or 10.1% of risk-weighted assets, as of the end of the third quarter, meeting the Basel III standard. But in order to meet the new 11.5% ratio indicated by the Fed for the highest-risk group, it would need more than $20 billion in additional capital.
The Fed’s more stringent requirements “should provide substantial net economic benefits by reducing the risks of destabilizing failures of very large banking organizations,” Fed Governer Daniel K. Tarullo said in a statement.
The central bank anticipates using one of two methods to calculate an individual bank’s surcharge. One method will consider the bank’s “size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity, consistent with a methodology developed by [Basel III].”
The other method, the Fed said, would replace substitutability with use of short-term wholesale funding and “would generally result in significantly higher surcharges.” The calculation would be based on the higher of the two surcharges.
“Inclusion of a short-term wholesale funding factor reflects the fact that reliance on short-term wholesale funding can leave a firm vulnerable to creditor runs that force the firm to rapidly liquidate its own positions or call in short-term loans to clients,” Tarullo explained.
Such a methodology could hurt Goldman Sachs and Morgan Stanley most. Short-term wholesale funding accounts for about 35% of their liabilities, compared with about 20% percent for the other six banks, Treasury & Risk reports, citing data compiled by Keefe Bruyette & Woods.