The Federal Reserve has proposed new rules for governing the size of reserve capital that big banks will need to keep on hand in the future.  The biggest banks will be required to achieve a 9.5% ratio of core capital to risk-weighted assets by 2019, as part of the Basel III reforms. Banks with assets in excess of $50 billion would be impacted - although the highest capital ratios would be applied to the largest of these banks - 31 such banks, including JP Morgan Chase, Bank of America and Citibank.  These banks will also be required to maintain a buffer of at least 5% of assets in safe, dependable capital reserves.

“A capital surcharge would help require that these companies account for the costs they impose on the broader financial system and would reduce the implicit subsidy they enjoy due to market perceptions of their systemic importance,” -- Fed statement in its proposal.

The new rules, however, will not apply to foreign banks with large U.S. operations.  The Fed plans to issue separate rules for some 100 foreign-based financial institutions at a later, unspecified date. The new rules are tied into stress tests that were announced last month - that test banks under conditions similar to those during the 2008 stock market crash. and major declines in global economic activity, along with an unemployment rate of 13%.  Also, the largest banks will be required to maintain a buffer of at least 5% of assets in safe, dependable capital reserves. Subsequent Safeguards. It's likely that, at a later point in time, the Fed might further require banks to maintain a certain amount of reserves as liquid assets, although such a requirement has not been finalized.  However, before deciding, the Fed first will consider actions taken by the Basel Committee on Banking Supervision - a global regulatory committee. The Basel Committee recently released its own set of rules, to require banks - by 2019 - to hold 10.5% of their assets in reserve - a jump from the current 8% requirement.  The Fed's rules don't appear tougher than those set by the Basel committee. Whatever direction the Fed takes, its new bank guidelines will reverse a 2-decade trends which has seen banks increase its leverage for making loans and financial bets.  In the years leading up to the financial crisis, the capital cushions at some Wall Street firms fell to as low as 3% of assets. Banks Looking at 2013/2014 Compliance Target Date. The Fed will hold accept public comments on its proposed rules until 3/31/12;  adoption of the rules could come no earlier than end of 2012.  With an additional year to prepare themselves, banks are looking at a compliance target date of 2013-2014. And that's presuming the absence of political distractions throughout 2012 - a very critical presidential election year. For further details, go to:   [CNN Money, 12/20/11]   and   [FT.com, 12/20/11]