The Federal Reserve is planning risk-based capital standards for the biggest banks that are tougher than those developed by their international counterparts, Fed Governor Daniel Tarullo told lawmakers.
The U.S. capital surcharge for will be higher than the level required by the Basel Committee on Banking Supervision, Tarullo said in testimony for the Senate Banking Committee. The surcharge formula will also hit harder against U.S. banks that lean most on short-term wholesale funding, he said.
“The financial crisis made clear that policy makers must devote significant attention to the potential threat to financial stability posed by our most systemic financial firms,” he said in his statement, adding that the changes may lead banks to reduce in size and risk-taking.
Tarullo, the Fed governor responsible for financial regulation, is testifying alongside top officials from five other agencies at a hearing on implementation of the Dodd-Frank Act.
His comments outlined an agenda for continued tightening of capital and liquidity requirements on the largest, most systemically important companies as agencies near completion of rulemaking required by the 2010 regulatory overhaul.
“We believe the case for including short-term wholesale funding in the surcharge calculation is compelling, given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm’s solvency and impose externalities on the broader financial system,” Tarullo said.
Global financial regulators have published a list of 29 banks set to face the capital surcharges because of the threat their failure would pose to the broader economy.
JPMorgan Chase & Co. and HSBC Holdings Plc were placed at the top of the most recent list, published in November 2013, putting them in line for extra capital requirements equivalent to 2.5 percent of their assets, weighted for risk. Other banks on the list would have had surcharges of 1 percent to 2 percent under the international standard, and now face the prospect of a higher U.S. level.
“We see this as broadly negative for the biggest banks, especially those that rely on short-term wholesale funding,” Jaret Seiberg, an analyst at Guggenheim Securities LLC, wrote in a research note on Tarullo’s statement. “They will face much higher capital charges than the market has been expecting and could have trouble boosting distributions in 2016.”
The 24-company KBW Bank Index fell as much as 1 percent today, the biggest drop in more than a month. JPMorgan slipped 88 cents, or 1.47 percent, to $59.01 as of 9:55 a.m. in New York trading, while Bank of America Corp. declined 17 cents, or 1 percent, to $16.18.
The Financial Stability Board, which brings together central bankers, regulators and government officials from the Group of 20 nations, has said that it will publish its next update to the list in November. That version would be the one used when the extra rules begin phasing in during 2016. The capital surcharges would apply fully as of January 2019.
The Fed is also working on rules to overhaul how financial firms use short-term lending, beyond tying it to surcharges, Tarullo said. The central bank may propose modifications to the so-called net stable funding ratio adopted in the Basel rules to boost liquidity requirements when banks provide short-term funding to other market participants.
In addition to Tarullo, senators will hear testimony today from the heads of the Federal Deposit Insurance Corp., Office of Comptroller of the Currency, Securities and Exchange Commission, Commodity Futures Trading Commission and Consumer Financial Protection Bureau.
In his opening statement, Senate Banking Committee Chairman Tim Johnson urged them to not weaken rules in the face of opposition from the banking industry and some lawmakers.
“As we get farther away from the crisis and calls to water down Wall Street Reform grow louder, policy makers cannot forget the lessons from the crisis and how costly a weak regulatory system can be,” the South Dakota Democrat said.
U.S. regulators last week adopted two rules that make new demands on bank liquidity and capital, a re-proposal of a rule on swaps margin and the OCC’s new policy on how banks must manage risk. One key measure sets requirements for the amount of high-quality, liquid assets big banks must stockpile to survive a 30-day liquidity drought. As with other rules that emerged from Basel accords, that rule was stiffer than the international standard.
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