US banks to pay up to $2.9b extra a year to insure against collapse

WASHINGTON • The largest United States banks will have to pay as much as US$2 billion (S$2.9 billion) more a year to insure against a future market collapse, the US Federal Reserve said on Thursday, as it outlined a new rule designed to further protect the financial system.

The rule demands Wall Street holds more debt that could be converted to shareholder equity if a bank is pushed to bankruptcy.

Investor-owned stock is the main buffer against a bank failure.

Half of the eight largest US banks would need to issue roughly US$50 billion in fresh debt to satisfy the new standard, known as Total Loss Absorbing Capacity (TLAC), according to Fed estimates.

Taken together, the eight banks' overall annual funding costs are set to increase by between US$680 million and US$2 billion, the Fed has said.

Fed officials declined to identify the four banks that lack sufficient debt. Wells Fargo & Co said last month that it envisioned issuing at least an additional US$29 billion in debt to satisfy the rule.

Large banks were already making significant strides to satisfy the new rule, Fed officials said.

The final rule issued on Thursday largely upholds a draft issued early this year, but with a few concessions to the industry.

Much existing debt will be counted towards satisfying the new rule, the Fed said, a process known as "grandfathering". "This grandfathering should significantly reduce the burden of complying with the requirements," it said in a statement.

Besides Wells Fargo, the banks expected to satisfy the new rule are JPMorgan Chase, Bank of America, Citigroup, State Street Corp, Bank of New York Mellon Corp, Morgan Stanley and Goldman Sachs Group.

Some of the largest subsidiaries of foreign banks must also satisfy the TLAC standard.


A version of this article appeared in the print edition of The Straits Times on December 17, 2016, with the headline 'US banks to pay up to $2.9b extra a year to insure against collapse'. Print Edition | Subscribe