January 10, 2018 / 2:16 PM / 2 months ago

Largest U.S. banks still 'too big to fail': Minneapolis Fed study

WASHINGTON (Reuters) - The Federal Reserve Bank of Minneapolis on Wednesday called for U.S. regulators to raise capital requirements for the largest U.S. banks, saying they are still “too big to fail” despite a slew of reforms introduced following the 2008 financial crisis.

The academic study by the bank’s staff estimated there is still a 67 percent chance of a taxpayer-funded bailout over the next 100 years and that common equity requirements for banks with assets exceeding $250 billion should be “dramatically” increased.

The study, two years in the making, comes as Republican President Donald Trump looks to roll back many post-crisis reforms which he says have stifled lending and economic growth.

The Minneapolis Fed has no direct regulatory role over the financial sector, so its recommendations would have to be taken up by the Federal Reserve Board, other regulators in Washington, and the U.S. Congress. With Republicans in power eager to loosen restrictions rather than tighten them, it seems unlikely the recommendations will gain traction.

The study recommends regulators require large banks to issue common equity equal to 23.5 percent of risk-weighted assets, roughly double what they currently hold. It also recommended a steeper leverage ratio of 15 percent.

The plan would also require the treasury secretary to certify that individual banks no longer pose a systemic risk. If he could say that for a specific bank, its capital requirements would automatically increase until the secretary is comfortable making that claim, either because the bank held enough capital to withstand shocks or because the institution has restructured itself to lower its footprint on the financial system.

The plan also recommended a tax on leverage for large “shadow banks” to ensure banking activity does not shift to more lightly regulated firms outside the traditional banking sector.

The Minneapolis Fed findings seemed at odds with Jerome Powell, the Fed governor who President Trump has nominated to serve as its next chair. In November, Powell told the U.S. Congress that he believed there were no U.S. banks that remained too big to fail.

Reporting by Michelle Price and Pete Schroeder; Editing by Jeffrey Benkoe

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