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Largest U.S. banks face $120 billion shortfall under new rule

A BNY Mellon sign is seen on their headquarters in New York's financial district, January 19, 2011. REUTERS/Brendan McDermid

By Dan Freed

(Reuters) - Six big U.S. banks need to raise an additional $120 billion, most likely in long-term debt, under a rule proposed on Friday by the Federal Reserve.

The requirements are aimed at ensuring that some of the biggest and most interconnected banks, which include Goldman Sachs Group Inc, (GS.N), JPMorgan Chase & Co, (JPM.N), and Wells Fargo & Co (WFC.N), can better withstand another crisis by turning some of their debt, particularly debt issued by their holding companies, into equity without disrupting markets or requiring a government bailout.

The banks are expected to meet the $120 billion shortfall by issuing debt, which is usually more cost-effective than issuing equity, according to Federal Reserve officials speaking at a background press briefing Friday. The rule proposed Friday, largely in line with banks' expectations, concerns the lenders' total loss-absorbing capacity.

It is one of a series of rules aimed at reducing risk in the banking system by determining how much debt and equity banks should use to fund themselves.

In a procedural vote, the Fed's governors approved a draft of the proposal, meaning it will be submitted for public comment.

During a public meeting with Fed officials, one staffer who worked on the rule said banks should have an easy time complying, because many requirements overlapped with existing rules. Further, the bulk of the debt requirements can be fulfilled by refinancing existing debt, the staffer said.

Some requirements must be met by Jan. 1, 2019, while more-stringent requirements must be met by Jan. 1, 2022.

The requirements are most stringent for JPMorgan, followed by Citigroup Inc. (C.N) After that come Bank of America Corp, (BAC.N) Goldman Sachs and Morgan Stanley, (MS.N) all of which have the same requirement. Wells Fargo & Co's (WFC.N) requirement is the next highest, followed by State Street Corp (STT.N) and finally Bank of New York Mellon Corp. (BK.N)

JPMorgan has more than $2 trillion in total assets, making it the largest U.S. bank by that measure.

The officials declined to say which two banks already meet the long-term debt requirements under Friday's proposal.

The rules also apply to U.S. operations of foreign globally systemically important banks, establishing roughly parallel requirements as those for U.S. banks, Fed officials said.

Also announced was a draft final rule establishing minimum margin requirements for swaps that are not cleared through an exchange. The rule is identical to one proposed by other regulators.

A Wells Fargo spokesman said in a statement the bank is reviewing the proposal and it appears to be in line with expectations. Representatives from the other banks either declined comment or were not immediately available.

(Reporting by Dan Freed; Editing by Chizu Nomiyama, Dan Wilchins and David Gregorio)