The Fed has launched recently the new rules which regulate banks’ activity. This made Wall Street banks concerned about how to readjust their business models according to these rules in order to survive.
On Tuesday Daniel Tarullo, the representative of Federal Reserve, spoke to the Senate Banking Committee and informed that the central bank hopes to launch a program which will help to develop small banks.
Banks that are to big have to give some space for the small and simpler banks to that provide loans for consumers, like best online loans.
Daniel Tarullo explained the rules which are going to be launched by the central bank and emphasized that financial institutions operating at Wall Street like Morgan Stanley would meet stringent requirements.
New Requirements for Big Banks
Big banks may be required to restrict activities associated with lending to investors like hedge funds. They may be even required to sell some other profitable operations. Many big banks became stronger after last financial crisis and the rules aim to change the situation.
Today, the analysts are curious about whether big banks would really agree to reduce their gains by the year of 2015. The new rules are going to determine the procedure of banks’ financing.
It would be strictly pointed whether it would be the stock issue or borrowing from other financial institutions.
The debt, be it short-term or long-term, is undesirable for banks in the circumstances of a financial crisis, as there would be no way for banks to get financing.
Large international banks have already been supposed to meet new capital requirements according to the program designed by the group of global regulators. They planned to set the minimum for the capital ratio at the level of 9,5 % for the biggest international banks.
Meanwhile, smaller banks were supposed to have the rate at the level of 7 %. But the Fed is planning to set the 11.5 % minimum of the capital ratio for some big banks. It also should be mentioned that not only banks with the largest capital should be subject to the highest capital standard. Short-term liabilities would play a great role in the capital ratio determination.
Big financial organizations like Morgan Stanley get their profits due to short-term transactions and such regulations are not favorable for them.
That means that such financial giant as Goldman Sachs will have to increase the capital by over $16,8 billion. The bank has options to cut down the business, sell stocks or hold on to profits.
Regulations Affect Other Participants of the Financial Market
Not only big banks’ activity is determined by new regulation. As Daniel Tarullo informs small banks may also meet some new requirements. The new rules are focused on those banks which could undermine the economy if the crisis forces them to fail.
There are 8 banks which have the major impact on the economy: Bank of America, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of New York Mellon, State Street, Wells Fargo and Citigroup.
On Tuesday, the bank’s executives got a chance to get a general idea of what would the new rules would look like. For now only State Street and Morgan Stanley have the capital ratio above 11.5 %.
Of course, regulations may undergo changes by the time they come into effect but still it takes much time until banks will be reconstructed under the new rules.