The Federal Reserve Bank of Minneapolis is making the case for top US lenders to increase capital requirements, saying taxpayers are still at risk of having to bail out banks in another crisis if levels are allowed to remain where they are.
The Minneapolis Fed released its final plan to end so-called too big to fail banks, including a call on the Treasury secretary "to certify that individual large banks are no longer systemically important or else subject those banks to extraordinary increases in capital requirements -- up to 38% over time," according to a statement on its website Wednesday.
Regulations put in place after the 2008 financial crisis "are considerably less effective in reducing risk," bringing the 100-year chance of a bailout to 67% from 84%. The Minneapolis Fed's plan cuts the risk to 9%, it said.
Banks are considered too big to fail when their potential insolvency would cause widespread spillover into the broader economy, forcing governments to step in an bail out the lenders with taxpayer funds. President George W. Bush signed the Emergency Economic Stabilization Act into law in October 2008, creating the Troubled Asset Relief Program which allowed the Treasury to spend up to $700 billion to shore up the financial system with purchases of troubled assets.
The Minneapolis plan also calls on the largest banks -- those with assets exceeding $250 billion -- to "dramatically" increase common equity capital to 23.5% of risk-weighted assets, and gives the Treasury secretary five years from implementation to certify banks as no longer too big to fail or "face extraordinary increases in equity capital requirements."
It's also calling for reduction in the regulatory burden on community banks and a shadow banking tax. While the Minneapolis Fed said it's not calling for bank breakups, the lenders facing higher capital levels are expected to face increased pressure to consider splitting themselves up.
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