Fed proposes extra capital cushion for 8 big US banks

Want these banks to fund themselves more through shareholder equity and less by borrowing

The US Federal Reserve on Tuesday proposed requiring eight of the largest US banks to hold an extra capital cushion, and said the firms will need more equity if they rely on risky types of debt.

Most of the banks, which include Citigroup and Goldman Sachs, would be held to higher capital requirements than under a similar rule by global regulators, officials said.

Regulators want US banks whose failure could threaten markets to fund themselves more through shareholder equity and less by borrowing. Officials also want to discourage banks from relying on funding methods they believe are risky.

"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," Fed Governor Daniel Tarullo said.

Fed officials estimated the banks would face a surcharge of between 1 and 4.5% of risk-weighted assets.

Most of the banks have enough equity to meet the requirements. Fed Vice Chairman Stanley Fischer said during Tuesday's meeting that JPMorgan Chase & Co would need more than $20 billion of additional capital to comply.

JPMorgan spokesman Andrew Gray said in a statement, "While we're still reviewing the Fed's proposal, we are well capitalized and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders."

The requirements are called for in the global Basel III agreement designed to make banks safer after the 2007-2009 financial crisis.

The global rules called for surcharges between 1 and 3.5% for the biggest banks. Charges vary depending on banks' size, complexity and other risk factors.

Under the Fed's proposal, which would take effect in 2016, US banks would calculate cushions using both the Basel method and a separate score that weighs short-term wholesale funding. They would have to meet whichever charge is higher.

The Fed estimated US banks' surcharges will be about 1.8 times the Basel requirement. Investment banks, such as Morgan Stanley, that use wholesale funding likely need the biggest buffers.

Senator Sherrod Brown, an Ohio Democrat, said he found it encouraging that the US is leading global safety-and-soundness standards.

Banks, however, said the plan could disadvantage them.

"Today's proposal could affect the American financial industry's ability to remain competitive in international markets," said Richard Foster of the Financial Services Roundtable.

Switzerland and Sweden have also imposed surcharges higher than Basel required.