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Regulators propose bailout prevention for 8 big banks

WASHINGTON — Federal regulators took a step Tuesday toward making eight of the largest U.S. banks meet a stricter measure of health to reduce the threat they pose to the financial system.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed that those banks increase their ratio of equity to loans and other assets from 3 percent to 5 percent. In addition, the banks' deposit-holding subsidiaries would have to increase that ratio to 6 percent.

If adopted, the rule would take effect in 2018. It would apply to U.S. banks considered 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.

Hundreds of U.S. banks received federal bailouts during the financial crisis that struck in 2008 and triggered the worst economic downturn since the Great Depression. The list included the nation's largest financial firms, including all eight banks that will be subject to the rule proposed Tuesday.

Regulators said the rule was intended to minimize the need for future bank bailouts. It was mandated by Congress in the 2010 financial overhaul, which was drafted in response to the crisis.

The rule would help create "a stronger, more resilient industry, better able to withstand environments of stress in the future," FDIC chairman Martin Gruenberg said before the FDIC board voted 5-0 to propose the rule and put it out for public comment 90 days. A final vote will be taken some time after that, possibly with changes.

The rule was written jointly with the Fed and the Comptroller's Office, a Treasury Department agency.

The agencies estimate that the banks' parent companies would have needed to increase their capital a total of about $63 billion to meet the requirement, if it had been in place in September. The deposit-taking subsidiaries would have needed an additional $89 billion, according to estimates.

The rule was the first of four mentioned last week by Daniel Tarullo, a Fed governor, targeting the eight large banks.

Tarullo said the goal is to build buffers to withstand financial stress and avoid another crisis in which taxpayers would have to bail them out. Many critics worry the largest banks still represent a danger to the financial system.

The regulators' move follows action the Fed took last week to increase the capital all large banks must hold as a cushion against risk. The FDIC and the Comptroller's Office adopted that rule Tuesday. It would require the banks to maintain high-quality capital equal to 4.5 percent of their loans and other assets.

Regulators propose bailout prevention for 8 big banks 07/09/13 [Last modified: Tuesday, July 9, 2013 8:52pm]
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