New Rules Force Big Banks To Keep A Bigger Cushion

Banking regulators at the FDIC and the Fed are voting on whether to impose tougher rules on big banks. Analysts think that the new regulations, which are expected to pass, will hurt growth prospects.

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Five and a half years after the financial crisis that devastated the global economy, U.S. officials are taking steps to strengthen the nation's banking system. Today, the Federal Reserve and the Federal Deposit Insurance Corporation approved tough new rules that require banks to hold a lot more capital on their books. Regulators say the requirements will reduce the risk of bank failures during bad economic times.

NPR's Jim Zarroli has more.

JIM ZARROLI, BYLINE: The new regulations say that big bank holding companies, such as Citigroup and JP Morgan Chase, will have to hold capital equal to five percent of their assets on their balance sheets. And their subsidiary banks will have to keep six percent. That's twice what they have to hold now and it is considerably more than banks in other developed countries have to hold.

The money acts as a kind of rainy day fund to help banks absorb losses in tough times, so they won't need to ask for federal bailouts.

Thomas Curry is the U.S. Comptroller of the Currency.

THOMAS CURRY: While we can't entirely prevent future disruptions, we can preserve confidence in the financial system by ensuring that our large banks are well capitalized. This rule is an important step in that direction.

ZARROLI: Regulators also approved separate rules that would change the way banks calculate their assets, bringing them in line with global standards.

The new rules come at a time when U.S. regulators have been tightening the screws on big banks. The Fed recently rejected a plan by Citigroup to increase the dividends it pay shareholders. That sent the company's stock price falling. The requirements approved today will force the banks to set aside tens of billions of dollars in additional capital. Officials of the financial services industry complained that would cut into the money they can use for lending and investments, and also reduce profits.

Karen Shaw Petrou, of Federal Financial Analytics, says that by limiting the activities of big commercial banks, the regulations will drive a lot of financial activity into what's called the shadow banking system; likely regulated hedge funds and private equity firms.

KAREN SHAW PETROU: Business will find a home where people can make money at it. And if the big banks can't because of these rules, the business is going to go to non-banks.

ZARROLI: Petrou says that since the financial crisis, the amount of assets held by the shadow banking system has been growing, and the new bank regulations will only accelerate that process. On the other hand, she says the requirements approved today are likely to do with they're intended to do: make big banks safer.

PETROU: Even if the big banks hold lots and lots of U.S. treasuries or low risk assets, they still have to hold a lot more capital than anybody else would hold against those obligations, to make them extra safe and extra sound.

ZARROLI: The new regulations don't take effect until 2018. But many banks are already surrendering to the inevitable and are expected to comply with the requirements well before that.

Jim Zarroli, NPR News, New York.

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