The Federal Reserve is seeking public comment on the standardsit would use in requiring the biggest banks to set aside additionalcapital as a buffer in periods when market risks raise the threatof future losses.

The countercyclical capital buffer is meant to ensure thatinternationally active financial institutions have enough capitalto absorb shocks without threatening the broader economic system.It will apply to banks with more than US$250 billion in assets suchas JPMorgan Chase & Co., Citigroup Inc., and Goldman SachsGroup Inc., and those with more than $10 billion in foreignexposure.

The Fed said it is setting the buffer at zero for now, but intimes of elevated risk that level could go up to 2.5 percent ofrisk-weighted assets. Regulators would give institutions a year tophase in any increase, which would be in addition to alreadyrequired minimum total risk-based capital levels banks mustmeet.

Banks unable to meet the buffer would face restrictions ondividend distributions and payment of discretionary bonuses.

In deciding whether to raise capital levels in the future, theFed will take into account leverage in the financial andnonfinancial sectors, liquidity transformation, and asset valuationpressures. The regulator also could consider risk-taking,performance, and the financial condition of large banks and trendsin real estate.

The Fed said the capital buffer is “designed to increase theresilience of large banking organizations when policymakers see anelevated risk of above-normal losses.” That should improve theoverall financial system, the central bank said.

Regulators had suggested the capital buffer in 2010 but had notlaid out the framework. The U.S. guidance follows internationalrules from the Basel Committee on Banking Supervision.

The Basel committee allowed member countries to set their ownframework for triggering the buffer and suggested that the level beguided by a calculation of credit to gross domestic product. TheFed's announcement provided additional factors to assess risk.

“The U.S. approach has many different triggers and therefore isa more effective countercyclical buffer and one big banks may besubjected to more frequently,” said Karen Shaw Petrou, managingdirector of Washington-based research firm Federal FinancialAnalytics Inc.

Banks have until Feb. 19 to comment on the proposed capitalbuffer.

–With assistance from Silla Brush.

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