Fed Makes it Tougher for Banks to be ‘Big’

While the debate continues over whether or not “Too Big to Fail” still exists, the Federal Reserve is trying to give the “big” banks an incentive to get smaller.

Two Fed governors, in separate public comments on Thursday, announced that the Fed’s stress test requirements will get tougher for systemically important institutions. In effect, the tougher stress test requirements will make it tougher for the “big” banks to be big.

Fed governor Daniel Tarullo told Bloomberg television that the tougher requirements include “a significant increase in capital.” Fed governor Jerome Powell said at a banking conference on Thursday that he hopes the new requirements will “fully internalize the risk” their size poses to the economy and that he has “not reached any conclusion that a particular bank needs to be broken up or anything like that.” Instead, Powell said the Fed will “raise capital requirements to the point at which it becomes a question that banks have to ask themselves,” according to the Wall Street Journal.

Capital requirements for the banks have been significantly raised since the financial crisis in 2008, which has forced the banks to evaluate whether or not they can maintain their current size and still be profitable. JPMorgan Chase, which is the largest bank in the country by assets, has already shrunk in response to the Fed raising capital requirements during normal times in 2015, according to the Journal.

The eight banks or investment banking firms affected by the Fed’s new requirements are Bank of America, Citigroup, Goldman Sachs Group, Inc., JPMorgan Chase, Morgan Stanley, Wells Fargo & Co., State Street Corp., and Bank of New York Mellon Corp.

The Fed announced on Thursday that results from the stress tests conducted as part of the Dodd-Frank Act will be released on Thursday, June 23, and that related results from the Comprehensive Capital Analysis and Review (CCAR), will be released on Wednesday, June 29. Both sets of results will be released at 4:30 p.m. EST on their respective days.

The tougher stress test requirements are not the only incentive for the eight systemically important institutions to get smaller. Out of those eight institutions, the Fed and the FDIC in April jointly rejected the “living wills” (plans as to how they would enter bankruptcy without causing widespread damage to the U.S. financial industry) of five of them—Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo.