JP Morgan told to raise $12.5bn more capital

Tuesday, Jul 21 2015 12:40 PM

The biggest US banks have been told to set aside an extra $200bn in capital buffers to protect themselves and the wider economy against a future crash. Seven of the eight lenders are already on track to meet the tougher new target, which is being imposed by the Federal Reserve because the banks are deemed to be globally systemically important financial institutions, whose collapse could cause shockwaves across the world. But JP Morgan still needs to raise more capital over the next three years, either by cutting back its assets, storing up profits or asking investors for more money.

As the biggest bank, it faces the biggest additional capital requirement, amounting to 4.5pc of its balance sheet, adjusted for risk. Next up is Citi, with a 3.5pc additional buffer, then Bank of America, Goldman Sachs and Morgan Stanley - all on 3pc. Wells Fargo’s surcharge comes in at 2pc, followed by State Street at 1.5pc and BNY Mellon at 1pc.

Janet Yellen Federal Reserve boss Janet Yellen said it is an important step in making sure the financial crisis does not happen again.

“A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others,” she said.

“In practice, this final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system.”

Her colleague on the board of governors, Daniel Tarullo, said that the capital requirements should be tougher because there is a risk the international agreement struck in Basel could have resulted in buffers being too small.

The new method “calibrates surcharge levels so that they will generally be higher than those required by the Basel method, and meaningfully higher for some of the firms”, he said. “As we noted in considering the proposed rulemaking last year, the calibration adopted in the Basel Committee was towards the low end of the reasonable range suggested by economic analysis.”

Speaking on Tuesday, before the Fed's announcement, JP Morgan's chief finance officer, Marianne Lake, said the bank could even build a bigger buffer than this.

"We're continuing to execute on everything that we've already told you we're going to do to optimise our capital. And our commitment is to go firmly within the 4.5pc bucket for the surcharge," she said.

"And if we believe we can do it and it's economic and it's not going to hurt our clients, we may go further. So look, we'll respond when we see the rules, and we're not going to stop continuing to do the best we can to optimize our returns based on scarce resources."

By Tim Wallace 20 Jul 2015

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