Tags: fed | stein | banks | surcharge

Fed’s Stein Backs Using Surcharges to Reduce Risk From Banks

Wednesday, 17 Apr 2013 09:54 AM

Federal Reserve Governor Jeremy Stein said regulators should make the biggest banks bear the cost of their systemic risk by imposing capital surcharges rather than by forcibly shrinking them.

“Higher and more robust capital requirements, new liquidity requirements, and stress testing all should help to materially reduce the probability of a” systemically important institution “finding itself at the point of failure,” Stein said in the text of remarks for a speech in Washington.

Some perceptions of eventual government support in times of stress remain, however, conferring a funding subsidy on the largest firms, Stein said. “Financial firms may still have excessive private incentives to remain big, complicated, and interconnected,” he said at an International Monetary Fund conference.

Rather than opting for caps on the size of banks or a forced separation of banking and investment banking and trading, Stein said regulators should stick to their current policy of capital surcharges for size and complexity and watch how this mechanism changes banks over time. If those surcharges aren’t high enough, regulators could change them, he said.

“The capital-surcharge schedule proposed by the Basel Committee for globally important systemic banks may be a reasonable starting point,” Stein said. “If after some time it has not delivered much of a change in the size and complexity of the largest of banks, one might conclude that the implicit tax was too small, and should be ratcheted up.”

Basel Committee

The Basel Committee on Banking Supervision has decided that systemically important global banks should bear a charge of 1 percent to 2.5 percent more capital to total assets weighted for risk based on their size, complexity and interconnectedness.

The Financial Stability Board in November listed 28 banks that should be subject to the surcharge. The list is updated annually and a phase in period begins to apply in 2016. Citigroup Inc., JPMorgan Chase & Co., HSBC Holdings Plc, and Deutsche Bank AG occupied the top tier in the group.

Chairman Ben S. Bernanke after the financial crisis raised analysis of financial stability to an equal footing with monetary policy, creating the Office of Financial Stability Policy and Research to monitor markets and financial institutions for risk.

Bernanke has worked with Daniel Tarullo, President Barack Obama’s first appointee to the Federal Reserve Board, to overhaul supervision and regulation. He has also mobilized economists, lawyers, and payment systems experts to oversee the biggest financial institutions in a group called the Large Institution Supervision Coordinating Committee.

The central bank gained power to set capital, liquidity and risk management standards under the Dodd-Frank Act.

Before joining the Fed in May, Stein, 52, was an economics professor at Harvard University in Cambridge, Massachusetts.

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Federal Reserve Governor Jeremy Stein said regulators should make the biggest banks bear the cost of their systemic risk by imposing capital surcharges rather than by forcibly shrinking them. Higher and more robust capital requirements, new liquidity requirements, and...
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Wednesday, 17 Apr 2013 09:54 AM
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