The Federal Reserve proposed new rules today designed to ensure that US banks can survive future financial crises without taxpayer-funded bailouts.
The proposed regulations include capital and liquidity requirements that will be phased in two stages, Reuters reported. In the first stage, US banks with more than $50 billion in assets will be required to show that they can maintain a cushion of capital reserves equal to 5 percent of assets even in times of severe economic stress. In the second stage, the Fed will implement the standards of the Basel III international bank regulatory agreement, which will require banks to maintain a cushion of 7 percent, with a surcharge of up to 2.5 percent for systematically important financial institutions.
In addition, the proposed rules limit attempt to limit the financial ties among the nation’s biggest banks.
According to the Wall Street Journal:
The 2008 financial crisis showed links among major institutions could destabilize the entire economy—as happened when securities firm Lehman Brothers went down and the U.S. government had to prop up Lehman's rivals.
The Fed said it would require that the net credit exposures between any two of the six largest financial firms to be limited to 10 percent of each company's regulatory capital, Reuters reported.
The rules also include triggers that would be activated if a bank were heading towards financial trouble, the New York Times reported. These include restrictions on growth and capital distributions and dividends, as well as limiting executive compensation, according to the Times.
One surprise in the proposed regulations is that smaller banks with $10 billion to $50 billion in assets will also be required to hold annual stress tests and establish risk committees, the Wall Street Journal reported. "That is a really bad idea," because it adds further burden to being a small bank, John Kanas, the chairman and chief executive of BankUnited Inc., which has about $10 billion in assets, told the Wall Street Journal. "Yet another little piece of our profitability will eke out the bottom of the door."
The Fed will deliver final regulations after the public comment period on the rules ends on March 31.
The Fed said the final capital rules were unlikely to disadvantage American banks competing against firms based in Europe and Asia, the New York Times reported.