Fed proposes stricter capital rules for banks

The Federal Reserve in Washington, DC
Chip Somodevilla/Getty Images/File

(AP) WASHINGTON - The Federal Reserve wants U.S. banks to set aside more money to cushion against unexpected losses, a key step in preventing another financial crisis.

The Fed on Thursday proposed rules requiring the nation's largest banks hold at least 6 percent of their assets in capital reserves. That's up from a minimum of 4 percent currently required and in line with international standards.

The 2010 financial overhaul mandated regulators raise capital requirements for banks. The banks have lobbied vigorously against the proposals. They say setting aside so much money in reserve could limit what they could lend.

Fed survey finds U.S. growth mostly steady
Bernanke: No policy shift unless economy sags
3 Fed members back more stimulus if economy weakens

The rules are open to comment until September. They will be finalized after that.

Fed Gov. Daniel Tarullo said Wednesday the JPMorgan's $2 billion-plus trading loss is a good example of why the rules are needed. He said JPMorgan was able to weather the loss because it had sufficient reserves to cushion against the loss.

"A bank with a strong capital position can absorb losses from unexpected sources," Tarullo said at a hearing of the Senate Banking Committee. "Strong capital buffers ensure that losses are borne by shareholders of the bank, not by taxpayers."

The Fed also finalized additional capital requirements for large banks that lend or trade between each other.

Those holding $500 billion or more in assets would have to set aside an additional 10 percent of the value of any lending or trading. Banks in this category include JPMorgan, Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc.

Banks have argued that being forced to hold too much capital would hamper their ability to make loans. A leading opponent of the international standards, known as the Basel III accords, was JPMorgan CEO Jamie Dimon.

Dimon pressed Fed Chairman Ben Bernanke in a public forum last year, asking if regulators had gone too far and might be slowing down the economic recovery. Last September, Dimon called the Basel standards "anti-American."

But Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington, notes that big banks already have increased their capital close to the stricter levels following the results of the stress tests that the Fed conducted on them.

For smaller banks, though, the stricter capital requirements will be "a real wake-up call," Petrou said in a research note.