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July 10, 2013

US to Require Biggest Banks to Hold More Cash Reserves

by VOA News

U.S. regulators are ordering the country's eight largest banks to double their cash reserves in hopes of preventing another financial crisis like the one that led to world economic turmoil five years ago.

Under the new requirement, the banks collectively might have to keep about $150 billion more in reserve as protection against loans, investments and other assets that fail. The affected banks include some of the best-known American corporations, including JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley, all of which operate globally.

The rules are part of an agreement reached by world financial regulators meeting in recent years in Basel, Switzerland, to force banks to keep more cash in reserve, so taxpayers do not have to bail out banks when they make bad lending or investment decisions. The U.S. requirements are well above those set by the international finance chiefs.

One U.S. banking expert, Bert Ely, said he does not think the bigger U.S. reserve requirements, however, will necessarily prevent another financial crisis like the one in 2008. He said that banks may just move some of their lending to what he described as lightly-regulated 'shadow banks," such as mutual funds and some types of securities.

"The problem is that bank capital requirements are like a tax on banks. And the higher you push those requirements, the greater the incentive is for financial engineers around the world to figure out ways to provide credit outside of the banking system. And this is what leads to the creation of what we call 'shadow banking,'" he said.

Ely said that U.S. regulators are hoping that by requiring the banks to keep more cash on hand, it will also force them to become smaller, to limit government financial responsibility for them if they make too many bad loans.

"While the purported reason for requiring the large banks to have more capital is to make them safer, there is another agenda afoot, at least in the United States. And that is to raise the capital requirements for the eight largest banks so high that they will be forced to downsize," said Ely. "This is seen as a way to get rid of the so-called 'too big to fail' problem, that is where you have banks that are so large that they cannot fail if they do a lot of bad lending."

The banks have until 2018 to meet the new reserve requirements.