New Capital Rules Hit Big U.S. Banks
What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you can do.
The cold, hard facts
The Financial Times is reporting that the Federal Reserve has proposed new rules for the largest financial firms, requiring them to hold more capital in a move that mirrors proposals by a group of global banking regulators known as the Basel committee.
The biggest banks will be required to achieve a 9.5% ratio of core capital to risk-weighted assets by 2019 as part of the so-called Basel III reforms. The rules would apply to all U.S. banks with more than $50 billion in assets, but the highest capital ratios would be reserved for the biggest of the big banks.
JPMorgan Chase (NYS: JPM) , Citigroup (NYS: C) , and Bank of America (NYS: BAC) are among the companies expected to be hit with the most stringent capital requirements. Foreign banks with large U.S. operations were spared from the proposed regulations for the moment and will be addressed separately later by the Fed.
What you can do
Your columnist has said before that the death of the financial crisis has been greatly exaggerated. In this case, that's a good thing. For how much devastation the big banks caused, they've gotten away with not much more than a swat on the nose from a rolled-up newspaper, i.e., the largely toothless Dodd-Frank law.
These proposed capital requirements, in line with what the rest of the world's doing a la Basel III, will go a long way toward making America's, and the world's, banking system safer and less likely to melt down. As the big banks have to divert revenue to meet these capital requirements, top and bottom lines will take a bit of hit, but this will be temporary. Once the money is there, it's there. And in the end, these banks will be more stable and, hence, even better investments.
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At the time this article was published Fool contributorJohn Grgurichloves the smell of newsprint in the morning, but he owns no shares of any of the companies mentioned in this column. The Motley Fool owns shares of Citigroup, Bank of America, and JPMorgan Chase. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.
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