Banks have had some rough years so far, and despite all the help received from the government, they’re in for a challenging next couple of years. At one point, banks made their own rules and had so much power it was easy to pass them through regulators, but now things changed. Any day now, Fed is expected to publish its new bank capital rules.
The Federal Reserve new rules aren’t only designed to regulate U.S. banks, but all across the world. The proposal the Fed is expected to release later this week is said to reflect a global agreement on bank capital, requiring the largest institutions to hold large capital buffers.
According to sources familiar with the matter, the Fed could release rules that will affect 31 banks with more than $50 billion in assets, such as JP Morgan Chase, Bank of America and Citibank.
The proposed rules will involve new standards with regard to liquidity, risk management structure, credit reporting, concentration limits, stress tests, contingent capital and short-term debt limits.
Brian Gardner, analyst at Keefe, Bruyette & Woods Inc. in Washington, said: “Within the Federal Reserve system, my view is that the New York Fed has been the biggest advocate for contingent capital. And if they don’t do contingent capital now, that doesn’t mean they won‘t revisit it down the road”.
John Dugan, partner at Covington & Burling LLP, explains: “The Fed is raising requirements as firms get bigger in part to reduce their systemic footprint. They are creating disincentives to growth and complexity. It definitely creates more cost the bigger you get”.
Obviously, banks did not lose time or the opportunity and have been lobbying regulators on the matter, saying that keeping money as capital will not drive them much money. It is another proof the government is trying hard to avoid having to bail out banks with taxpayers’ money, while banks and managers were getting wealthier each day.
Analysts say the new requirements are going to affect banks’ earnings for 2012. Paul Miller, analyst with FBR Capital Markets, warns “weak players in particularly are getting banged up”. So far, Morgan Stanley, Citigroup, JP Morgan and Bank of America posted stocks in decline.