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Federal Reserve Proposes New Bailout Rules To Remove Taxpayer Burden

ROBERT SIEGEL, HOST:

Today, the Federal Reserve moved closer to approving a plan to protect taxpayers from the kinds of bank bailouts we saw in the financial crisis of 2008. The new rules would require the country's biggest banks to keep more capital on hand to cover any losses in case of another meltdown. NPR's Jim Zarroli reports that the banks will have to issue $120 billion in long-term debt to meet the requirements.

JIM ZARROLI, BYLINE: The taxpayer-funded bailouts of big banks in 2008 generated a wave of public anger that has still not subsided, and bank regulators around the world have been trying to deal with the consequences. They've set up stress tests to monitor the health of banks and force the banks to write up living wills spelling out how they could be dissolved in the event of a meltdown. The rules just approved are one more step in the effort to address the too-big-to-fail problem, said Fed Chair Janet Yellen.

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JANET YELLEN: The proposal, combined with our other work to improve the resolvability of systemic banking firms, would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms.

ZARROLI: The rules apply to eight big bank holding companies that are considered systemically important - that is, their failure would cause a major crisis in the global financial system. These banks are already required to keep certain levels of capital on hand to protect their customer's assets in the event of a downturn. Under the new rules, they would have to keep a new layer of what's called loss-absorbing capital on their balance sheets. Banks that don't have the capital would have to sell long-term bonds to raise what they need. Stephen Lubben teaches at Seton Hall Law School.

STEPHEN LUBBEN: And the idea is that if the financial institution gets in trouble, the first thing that'll happen is the existing shareholders will be wiped out and those bondholders will be involuntarily made into the new shareholders of the financial institution.

ZARROLI: Lubben says the new capital requirements would set up a kind of second layer of defense against another meltdown.

LUBBEN: We're trying to create a series of steps that would all be in front of a possible federal bailout.

ZARROLI: Down the road, the new capital requirements would also apply to big foreign banks that do a lot of business in the United States. The rules would be costly. Fed officials say that six of the eight biggest U.S. banks lack enough capital to meet the new requirements, although they wouldn't say which six. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.

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