The Federal Reserve proposed new capital and liquidity rules for the largest U.S. banks that would roll out in two phases and not likely go further than international standards.
The plan issued on Tuesday closely follows statements the Fed has made in recent weeks to calm Wall Street concerns that U.S. standards may be more aggressive than those from other nations, putting U.S. banks at a disadvantage.
The Fed said that both the capital and liquidity requirements in last year's Dodd-Frank financial oversight law would be implemented in two phases.
The first phase would rely on policies already issued by the Fed, such as the capital stress test plan it released in November.
That stress test plan will require U.S. banks with more than $50 billion in assets to show they can meet a Tier 1 common risk-based capital ratio of 5 percent during a time of economic stress.
The second phase for both capital and liquidity would be based on the Fed's implementation of the Basel III international bank regulatory agreement.
That standard brings the Tier 1 common risk-based capital ratio requirement to 7 percent, plus a surcharge of up to 2.5 percent for the most complex firms.
They're basically following the guidelines from Basel on the capital buffer. There were really no big surprises, said Gerard Cassidy, bank analyst at RBC Capital Markets.
One area still unclear is how much the surcharge will be for banks that are above $50 billion in assets but are not designated as globally systemic.
It looks like they are taking a pass on that, said Joe Engelhard, a bank policy analyst at Capital Alpha Partners.
The KBW Bank Index of stocks was trading up 4.5 percent following release of the Fed proposal, a slight gain over where it was prior to the release.
The rules, once finalized, will apply to all banks with more than $50 billion in assets, including Goldman Sachs Group Inc, JPMorgan Chase & Co and Bank of America.
Most large U.S. banks already meet the Basel III requirements scheduled to fully go into effect in 2019.
For its liquidity requirements, the Fed is waiting on the Basel Committee on Banking Supervision to flesh out its own liquidity recommendations before setting out U.S. requirements.
The central bank said it initially would hold U.S. banks to a qualitative liquidity standard.
Under the Fed plan, banks would have to assess, at least once a month, what their liquidity needs would be for 30 days, for 90 days, and for a year, during a time when markets are stressed. They would be required to have enough liquid assets to cover 30 days of operations under these circumstances.
The proposals released on Tuesday are aimed at ensuring that financial firms have enough capital and liquid assets on hand to weather a future financial crisis. During the 2007-2009 crisis, taxpayers put up $700 billion to bail out the financial system, partially through capital injections into banks.
THREE MONTHS OF LOBBYING
The rules will be out for public comment until March 31, 2012, giving Wall Street time to argue that being forced to keep so much cash on hand it will hurt lending and the economic recovery.
Executives, including JPMorgan Chief Executive Jamie Dimon, have complained that regulators are littering the financial landscape with rules, without properly analyzing their economic impact.
A Fed official on Tuesday said the agency does not have an estimate on how much the capital and liquidity standards will impact U.S. gross domestic product.
But he said the net benefit to the financial system outweighs the cost to Wall Street and any short-term decrease in credit availability.
The rules proposed will not only apply to the largest U.S. banks. They will also cover any financial firm the government identifies as being important to the functioning of financial markets and the economy.
The government has yet to decide which non-banks, such as insurance companies and hedge funds, meet this standard.
When such companies are designated, the Fed said it may tailor the rules, which were drafted mostly with banks in mind, to better fit that particular company or industry.
The law also requires the Fed to write tougher standards for foreign banks with operations in the United States. Fed officials said on Tuesday they would release those proposals soon, and that they would apply to about 100 firms.
UNTANGLING THE BANKS
The Fed rules also try to limit the dangers of big financial firms being heavily intertwined. It would limit the credit exposure of big banks to a single counterparty as a percentage of the firm's regulatory capital.
The credit exposure between the largest of the big banks would be subject to an even tighter limit.
Further, the Fed proposal requires banks to bolster their capital if it appears they are heading into trouble, such as being overexposed to risky assets.
The rule outlines four phases of this remediation process that a bank or other large financial organization would go through if it hits certain triggers signaling weakness.
If a bank does not bounce back after following through on requirements such as a capital boost, the regulators could then restrict dividends, compensation, or even recommend the institution be seized and liquidated.
The Fed did not provide details about how much of the remediation process would be made public.
(Reporting By Dave Clarke; Additional reporting by Lauren Tara LaCapra, David Henry in New York and Alexandra Alper in Washington; Editing by Tim Dobbyn)