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Fed Ramps Pressure for Biggest US Banks to Shrink

“The Federal Reserve is pushing the biggest U.S. banks to shrink so that they're less of a risk to the financial system.

“In testimony at a Senate hearing Tuesday, Fed Gov. Daniel Tarullo highlighted several proposals that regulators are working on. They include imposing additional capital requirements for the eight largest banks — including JPMorgan Chase, Citigroup and Bank of America — that exceed the levels mandated by international regulators. That means the banks would have to set more cash aside and raise more money to increase their cushions against unexpected losses.

“The amount of these "capital surcharges" would increase in proportion to how risky the regulators deem a bank to be, Tarullo told the Senate Banking Committee. That could push them to cut their risk and become less risky to the system. They would have an incentive to shed businesses and get smaller because otherwise they'd have to set aside more capital. Some of the banks have grown bigger since the crisis.

“The proposals aren't new. But combined with recent actions by the Fed and other federal regulators, experts say they carve out a tough stance.”

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"Last month, in an action viewed as signaling toughness, the Fed and the Federal Deposit Insurance Corp. told the 11 biggest U.S. banks that their plans for unwinding their operations in case of failure are inadequate to prevent the sort of financial disaster that struck in 2008. And last week, the regulators required all large U.S. banks to keep enough high-quality assets on hand to survive during a severe downturn. The rules subject the banks for the first time to so-called "liquidity" requirements, replacing voluntary standards. Liquidity is the ability to access cash quickly.

"The Fed is signaling to Wall Street ... that it is dead serious about making these banks assume the cost of their high-risk activities" rather than taxpayers, Dennis Kelleher, president of Better Markets, said in a telephone interview. The group advocates strict regulation."

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Ready the full Associated Press article by Marcy Gordon here.

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