The US Federal Reserve has issued proposed regulations that would put additional requirements on large US banks. The banks sure to be affected by the new rules include Goldman Sachs Group Inc. (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC).

The Fed says that it is issuing the proposed regulations in an attempt to redress the public perception that there are financial institutions that are “too big to fail:”

The market perception that some companies are “too big to fail” poses threats to the financial system.  First, it reduces the incentives of shareholders, creditors and counterparties of these companies to discipline excessive risk-taking.  Second, it produces competitive distortions because companies perceived as “too big to fail” can often fund themselves at a lower cost than other companies.  This distortion is unfair to smaller companies, damaging to competition, and tends to artificially encourage further consolidation and concentration in the financial system.

The proposed regulations apply to banks and other financial institutions with assets valued at more than $50 billion. Foreign banks would also be subject to new regulations, but the Fed has not released those yet.

The Fed’s action today formalizes the expected adoption of the Basel III rules on capital reserve ratios. The proposed regulations also include stricter liquidity requirements, more stringent stress tests, single-counterparty credit limits, and preventive measures that would allow early intervention in the event of financial weakness.

The Fed will accept comments on the proposed regulations until March 31, 2012. There are sure to be plenty of comments, and those comments are very likely to be delivered at top volume.

Paul Ausick

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