The Federal Reserve on Tuesday said the largest U.S. banks and financial companies should hold extra cash on their balance sheets to cushion themselves against financial crises.
The proposal by the chief U.S. banking regulator will affect banks with over $50 billion in assets. There are even stricter rules for companies with over $500 billion in assets such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc.
Fed officials didn't give a timeline for when the rules will be implemented but said the final rules will be released only after the regulators will have a chance to incorporate comments from the public. The Fed is accepting comments for 90 days.
The rules are part of new regulation proposed under the Dodd-Frank Act, which was passed last year. Named for former Sen. Christopher Dodd and outgoing Rep. Barney Frank, the new law was written to overhaul the financial system and curb practices that were thought to be responsible for the financial crisis.
Tighter capital rules were also spelled out by international regulators in Basel, Switzerland and were specifically targeted at large interconnected global financial institutions that do great volumes of business with each other. The failure of one such bank or financial company could break the chain of links, destabilizing the global financial system.
Most U.S. banks opposed the rules. They argued holding too much extra cash would hamper their ability to make loans. One of the lead advocates against the rules was Jamie Dimon, CEO of JPMorgan Chase. In June, Dimon pressed Federal Reserve Chairman Ben Bernanke in a public forum asking if regulators had gone too far and might be slowing down the economic recovery. In September, Dimon called the Basel rules "anti-American."
However, the Fed said that the benefits to society from a stronger banking system outweighs the short term effects on credit availability or credit costs from these new rules.