Business

US Federal Reserve proposes stricter rules for banks

  • 21 December 2011
  • From the section Business
Bank of America sign
Image caption Bank of America would be one of the institutions hardest hit by the new rules

The US Federal Reserve has proposed new rules for large US banks aimed at strengthening the financial system against another collapse.

Banks with more than $50bn in assets will have to increase the minimum amount of cash they hold.

The largest institutions, including Bank of America and Goldman Sachs, will face even tougher requirements.

US banks have opposed increasing capital cushions, arguing it could stifle lending.

Backing Basel

The Fed's proposals are based on the Dodd-Frank financial reform law that was passed by the US Congress last year.

Its aim is to prevent another financial crisis following the collapse of Lehman Brothers investment bank in 2008.

Under the proposals, banks with more than $50bn in assets would have to meet a Tier 1 capital ratio of 5%. That would rise to 7.5% by 2019, in line with the internationally agreed Basel III banking rules.

The biggest financial institutions in the US, deemed systemically important to the global financial system, would be required to raise up to another 2.5% as a capital cushion.

US bank shares rose strongly on the news, with analysts saying the requirements were less onerous than expected. JP Morgan rose 5% and Citigroup was up by 4.6%.

Under Dodd-Frank, the Fed is being given more oversight of the largest financial institutions in the US.

The proposals will be put out for consultation until the end of March next year.

Many countries are reforming their banking laws in the wake of the 2008 financial crisis.

On Monday the UK chancellor George Osborne confirmed that banks would have to ring-fence their retail banking operations, which take deposits and lend to ordinary consumers and businesses, from higher-risk investment banking.

That would mean that the two could be more easily separated, allowing the government to rescue the retail banking arm only.

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