The Federal Reserve sent a message to the largest U.S. financial firms: Staying big is going to cost you.
The Fed's warning, articulated in a pair of rules it finalized Monday, is among the central bank's starkest postcrisis regulatory moves pressing Wall Street banks to reconsider their size and appetite for risk.
The Fed completed one rule stating that the eight largest banks in the country should maintain an additional layer of capital to protect against losses, its plainest effort yet to encourage them to shrink. At the same time, it offered a reprieve to General Electric Co.'s finance unit from more-intensive regulation, after the company promised to cut its assets by more than half.
The moves reinforce the central mandate of the Dodd-Frank financial overhaul law signed by President Barack Obama five years ago.
Regulators have pushed big banks to expand their capital buffers to better absorb losses, reduce their reliance on volatile forms of funding, improve their risk management and cut back on risky assets. So-called stress tests measure banks' resilience each year and can restrict shareholder payouts at firms that don't pass.
For Wall Street banks and their investors, the emerging regime presents a series of choices: specifically whether to pay the cost of new regulation, which will fall to the bottom line, or change their business models by shedding businesses or withdrawing from certain markets, such as owning commodities.
The Fed "clearly intends the very largest U.S. banks to buckle under this new capital regime, restructuring quickly and dramatically," said Karen Petrou, a managing partner at Federal Financial Analytics, a policy-analysis firm.
J.P. Morgan Chase & Co., the largest U.S. bank with assets worth $2.449 trillion, will have to maintain more capital than any of its peers, with its minimum capital requirement raised by 4.5% of assets under management as a result of the new rule. J.P. Morgan has resisted calls from lawmakers and others to break up its operations, and instead has jettisoned or adjusted businesses to comply with the new mandates.
"Everything's doable—it just costs money," said Glenn Schorr, a banking-industry analyst with Evercore ISI, the research arm of investment bank Evercore Group LLC. Mr. Schorr said banks could hold less capital but would have to cut parts of their business.
Fed Chairwoman Janet Yellen, before voting to approve the new measure, said financial firms must "bear the costs that their failure would impose on others." She offered banks the choice of maintaining more capital to reduce the chance they would fail, or get smaller and reduce the harm their failure would have on the financial system.
These kinds of restrictions on banks have prompted worries about unintended consequences, such as volatility in financial markets that some ascribe to banks being less willing to take on risk.
The Financial Services Roundtable, a trade group representing big banks, said the new capital rule adopted Monday will push banks to curtail lending. "Regulators should reasonably address risk, but this rule will keep billions of dollars out of the economy," said Tim Pawlenty, the group's president.
Unclear is how far regulators intend to push the biggest banks. Ms. Yellen and other officials left open the possibility that the capital rule finished Monday would be incorporated into the central bank's annual stress tests, a significant move that would make it harder to meet the test's targets without further changes to the banks' balance sheets.
Both Goldman Sachs and Morgan Stanley have shed nearly one-quarter of their assets since 2007, cutting capital- intensive trading activities that no longer produce the profits that justify their costs. In Goldman's case, the firm has also sold ancillary businesses that don't fit into its long-term plans, such as insurance.
J.P. Morgan Chief Executive James Dimon has defended the bank's scale, citing its good returns and high customer satisfaction. "We still want that pre-eminent position, and we're not going to give that up for anyone," he said at J.P. Morgan's investor day in February. A J.P. Morgan spokesman on Monday said the bank is analyzing the rule.
Still, in 2014 the bank stopped operating about a dozen businesses, including physical commodities and student-lending origination. The Wall Street Journal reported in February that J.P. Morgan would begin charging large institutional customers fees for certain deposits, citing rules that make holding money for some clients too costly. Retail deposits weren't affected.
The other seven large banks covered by the new rule, including Citigroup Inc. and Bank of New York Mellon Corp., must maintain additional capital buffers of between 1% and 3.5%, the Fed said.
Already, firms have taken steps ahead of the Fed's move, issuing billions of dollars in preferred shares and long-term debt, beefing up capital by retaining earnings and bolstering profits from businesses considered safer, such as wealth- and asset-management.
"We're not capital short," James Gorman, Morgan Stanley's chief executive, said during a conference call on Monday before the Fed's final rule was released. "If anything, we're capital heavy."
Of the eight big banks, only J.P. Morgan doesn't have enough capital to meet the rule, which comes into full effect in 2019. The bank has a $12.5 billion shortfall, according to Fed officials. J.P. Morgan executives have said they believe they can cut businesses and take other actions to meet the deadline.
The size of each bank's additional capital requirement is tailored to the firm's relative riskiness, as measured by the Fed's formula, which considers factors such as size, entanglements with other firms and internal complexity. As those factors shrink or grow, so will a bank's surcharge.
In a sign of the central bank's preferences, on Monday it delayed until 2018 tough rules that would have fallen on GE Capital in 2017, giving the GE unit time to carry out its wind-down plan. GE Capital was under scrutiny because U.S. regulators in 2013 judged its failure could hurt the broader U.S. economy and designated it "systemically important," a label created under Dodd-Frank that brings stricter oversight to such firms from the Fed.
GE since said it planned to shed the very qualities—and assets—that made the finance unit subject to oversight in the first place. No company has been able to lose the label of "systemically important" and the Fed didn't promise GE would be able to, either. GE said Monday it was "grateful" for the Fed's action.