Fed Imposes New Limits on Big Banks to Reduce Bailout Risks
By Ryan Tracy

The Federal Reserve proposed a new bank bailout-prevention rule that would place new restrictions on how big financial institutions manage their finances—increasing their costs and restricting the way they run their business—in the name of preserving financial system stability. Karen Shaw Petrou, an independent analyst who does consulting work for large financial firms as managing partner of Federal Financial Analytics, Inc., noted that as a result of the rule’s costs “it will be more difficult for these banks offer competitive loan products,” potentially creating opportunities for smaller banks or mutual funds and other nonbanks. The Fed is seeking a minimum “total loss-absorbing capacity”—a combination of shareholder equity and debt—of at least 18% of risk-weighted assets for the eight American institutions designated as “global systemically important bank” that could threaten the global financial system if they suffered serious losses. That figure is expected to rise higher for firms considered to pose outsize risks because of the size, breadth, and nature of their operations, such as J.P. Morgan Chase & Co.