Fed May Raise Capital Requirements for Largest Banks

The Federal Reserve Board announced this week that it may raise capital requirements for the largest banks when the risk of above-normal losses is elevated in order to protect the resilience of the financial system.

The Fed’s policy statement released this week, which passed by a unanimous vote, detailed the framework it will follow in setting what is known as the Countercylical Capital Buffer (CCyB) to help the largest banks absorb shocks associated with declining credit conditions.

The CCyB applies to internationally active banking organizations subject to advance approaches capital rules, which are generally those that have more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures, according to the Fed. Roughly 10 banks will be affected, among which are JPMorgan Chase, Bank of America, and Wells Fargo.

Any depository institution of a banking organization that fits into this category will also be subject to the CCyB.

The factors that the Fed may consider when evaluating settings for the CCyB may include, but are not limited to, leverage in the financial and nonfinancial sesctors, maturity and liquidity transformation in the financial sector, and asset valuation pressures. The factors the Fed uses may change over time due to the constant evolution of economic and financial risks.

The Fed stated it intends to give the institutions time to raise more capital. The central bank said it will activate the CCyB when systemica vulnerabilities are meaningfully above normal, and that the bank will increase the CCyB gradually.

In the final policy statement also states that the Fed expects to remove (or reduce) the CCyB when the conditions that caused the activation of the CCyB abate or lessen, and when financial stability would be promoted with the release of CCyB capital.

According to the final policy statement, the Fed generally expects it will provide notice to the public and seek comment on the proposed level of the CCyB before making any determination as to changes to the CCyB.

Click here to view the final policy statement.