WASHINGTON—The Federal Reserve is set to finalize the amount of
additional capital the nation's eight biggest banks must maintain,
with J.P. Morgan Chase & Co. facing the highest capital
increase of the group, a policy designed to encourage firms to
reduce their size or risk profile.
J.P. Morgan would face a capital "surcharge" of 4.5% of its
risk-weighted assets under the final rule. The other seven firms
must maintain an additional capital buffer of between 1% and
3.5%.
J.P. Morgan has made some strides in raising the equity needed
to meet the new requirement, Fed officials indicated, saying the
bank is about $12.5 billion shy of the surcharge, which takes full
effect in 2019. In December, Fed governor Stanley Fischer, in an
apparent slip, disclosed that J.P. Morgan was about $21 billion
short.
The other banks currently have enough capital to meet the
requirement, the officials said.
The size of each bank's additional capital requirement is
tailored to the firm's relative riskiness, as measured by a formula
created by international regulators and the Fed. A bank's surcharge
can grow or shrink depending on changes such as size, complexity
and entanglements with other big firms.
The Fed Board of Governors is slated to formally adopt the final
rule at an open meeting this afternoon.
The Fed unveiled the details of the final rule, first introduced
last December, nearly five years to the day since President Barack
Obama signed the Dodd-Frank financial overhaul into law. In keeping
with the spirit of that legislation, Fed officials say the capital
requirement is designed to encourage the biggest banks to shrink
and take other steps to reduce the threat their potential failure
poses to the financial system.
"A key purpose of the capital surcharge is to require the firms
themselves to bear the costs that their failure would impose on
others," Fed Chairwoman Janet Yellen said in a written statement
prepared for this afternoon's open meeting. "They must either hold
substantially more capital, reducing the likelihood that they will
fail, or else they must shrink their systemic footprint, reducing
the harm that their failure would do to our financial system."
Banks would have to meet this additional capital requirement
with common equity, considered the highest form of regulatory
capital because it can directly absorb losses. The new surcharge
requirement comes on top of a base 7% common-equity capital
requirement that most banks face.
The surcharge gives big banks a choice. They can fund their
operations with less borrowed money and hold more common equity,
which can crimp returns. Or, they can reduce the size of this new
surcharge by shrinking or making other changes such as cutting
their reliance on short-term funding sources that can be
volatile.
Among the other banks: Citigroup Inc. faces a 3.5% surcharge;
Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley
face 3%; Wells Fargo & Co. 2%; State Street Corp. 1.5%; and
Bank of New York Mellon Corp. 1%.
Write to Victoria McGrane at victoria.mcgrane@wsj.com
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