The Federal Reserve on Tuesday said the largest U.S. banks and financial companies should hold extra cash on their balance sheets to cushion themselves against financial crises.
The proposal by the chief U.S. banking regulator will affect banks with over $50 billion in assets. There are even stricter rules for companies with over $500 billion in assets such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc.
Fed officials didn't give a timeline for when the rules will be implemented but said the final rules will be released only after the regulators will have a chance to incorporate comments from the public. The Fed is accepting comments for 90 days.
The rules are part of new regulation proposed under the Dodd-Frank Act, which was passed last year. Named for former Sen. Christopher Dodd and outgoing Rep. Barney Frank, the new law was written to overhaul the financial system and curb practices that were thought to be responsible for the financial crisis.
Banks are also subject to tighter rules spelled out by international regulators in Basel, Switzerland that were specifically targeted at huge, global financial institutions that do large volumes of business with each other. The failure of one such bank or financial company could destabilize the global financial system, which is what happened when Lehman Brothers collapsed in 2008.
The rules call for banks with over $50 billion in assets to hold cash that is worth at least 5 percent of the value of their assets. The cash will cushion them against bad loans and investments.
The larger banks and institutions with over $500 billion in assets will also have to set aside 10 percent of the value of any lending or trading between each other. The Fed is also planning to issue another rule in the future, under which those larger institutions will have to pay a surcharge to their regulators based on the amount of risk in their balance sheets.
The Fed also adopted rules for smaller banks with over $10 billion in assets. These banks will have to undergo stress tests conducted by their regulators to ensure that they are adequately prepared for an economic downturn.
Most U.S. banks oppose these stricter rules. They have argued that holding too much extra cash would hamper their ability to make loans. One of the lead advocates against the rules was Jamie Dimon, CEO of JPMorgan Chase. In June, Dimon pressed Federal Reserve Chairman Ben Bernanke in a public forum asking if regulators had gone too far and might be slowing down the economic recovery. In September, Dimon called the Basel rules "anti-American."
However, the Fed said that the benefits to society from a stronger banking system outweighs the short term effects on credit availability or credit costs from these new rules.
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