Today the Federal Reserve unveiled part of its proposed rules for regulating "too big to fail" banks and other financial institutions. The 173 pages of rules, called for in the Dodd-Frank financial reform law, are designed to minimize the amount of damage one TBTF institution can do to the economy in the event it goes under.
From Donna Borak at American Banker:
Regulators opted to roll out risk-based capital and leverage requirements in two phases. First, firms will be required to follow the Fed's November guidelines to capital planning, which require companies to conduct stress tests and maintain adequate capital, including a Tier 1 risk-based ratio of greater than 5%, both under expected and stress conditions.
As part of the second phase, the Fed will issue a proposal to implement a risk-based capital surcharge for systemically important firms based on principles already agreed upon by the Basel Committee on Banking Supervision.
It is not clear exactly which institutions will face a surcharge. The largest 8 U.S. banks have already been targeted by international regulators for a surcharge of between 1% to 2.5%.
But Fed Gov. Dan Tarullo has previously suggested that all firms with greater than $50 billion of assets could face at least a "modest" surcharge. Fed officials did not provide any further information Tuesday on what kind of surcharge such firms would pay.
What this all means for consumers is higher regulatory costs for TBTF financial institutions, which will likely try and pass some of those costs on to customers. Checking accountholders have seen a lot of that lately, as banks have raised fees and discontinued services like debit card rewards to try and make up for pricey new regulations.
But there might be some benefits for consumers beyond whatever stability the regulations add to the financial system. One possible benefit for customers at smaller banks is that they'll be a lot less likely to see their account absorbed into a larger bank because of a merger, which tends to shake up account terms and conditions overnight, and not for the better.
That's because the new regulations will make being TBTF much less attractive for financial institutions. Once upon a time, it made a lot of sense for banks to try and become as big as possible, because once a bank reached the TBTF threshold, they received a host of benefits. The Fed proposal alludes to this:
The market perception that some companies are "too big to fail" poses threats to the financial system. First, it reduces the incentives of shareholders, creditors and counterparties of these companies to discipline excessive risk-taking. Second, it produces competitive distortions because companies perceived as "too big to fail" can often fund themselves at a lower cost than other companies. This distortion is unfair to smaller companies, damaging to competition, and tends to artificially encourage further consolidation and concentration in the financial system.
The new capital requirements, which require TBTF banks to hold more of their money in the form of low-earning liquid assets, imposes a penalty of sorts on excessive size that should, along with all the new compliance costs and the Durbin amendment's $10 billion cut-off for swipe-fee limits, make being a financial juggernaut seem much less attractive.
What do you think? Should TBTF institutions have stricter rules than smaller institutions?
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