In hopes of preventing a repeat of the 2008 financial crisis, regulators set stringent new rules that require America's biggest banks to hold an extra $68 billion of cash on their balance sheet.
US Federal Reserve, the Federal Deposit Insurance Corporation and Comptroller of Currency have signaled they would like to tighten banking rules even further, as they introduced the new rule requiring lenders such as JP Morgan and Goldman Sachs to shore up their capital reserves
Under the new legislation, approved on April 7th by the US Federal Reserve, the Federal Deposit Insurance Corporation and Controller of Currency together with the eight largest US banks will have to hold at least 5 percent of their total assets in cash starting in 2018, instead of the 3 percent previously required
This series of sweeping reforms are designed to ensure banks have enough money to cover their losses in the event of a major financial disaster. Such a change is serious for investment banks such as Goldman Sachs and Morgan Stanley, who do not have retail banking operations that accept cash deposits from customers.
As a result, all of the affected banks, including Citigroup, Wells Fargo, State Street and Bank of New York Mellon, will have to take the new capital requirements into consideration as they decide how much dividends to pay.
However, doubts remain about the rules' effectiveness and the fate of the banking industry. Many speculate the banks might decide to take on more risks to compensate or raise fees and interest rates to offset the 2% idle capital.
- Haley Jiayu Zhou