“A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others,” Fed Chairwoman Janet Yellen said. “They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system.”
However, the increased capital buffer means banks will have less money available to work, which could lead to lower profits. The greater regulatory pressure on the financial sector may have also contributed to the lower long-term performance. For instance, XLF has returned an average annualized 14.3% over the past five years, whereas the S&P 500 index returned 17.3%.
Financial Select Sector SPDR
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Max Chen contributed to this article.