The Federal Reserve will compel the largest U.S. banks with $50 billion or more in assets to take “affirmative steps” to increase capital during the phase-in of higher capital standards.
“The Federal Reserve will require bank holding companies that are subject to our proposed capital plan rule, generally companies with $50 billion or more in total assets, to take affirmative steps to improve capital ratios, such as external capital raises,” ensuring compliance deadlines under U.S. and international guidelines in Basel III, Fed Governor Daniel Tarullo said today in Washington. He was referring to the bank capital agreements by global regulators who meet in Basel, Switzerland.
Global regulators said in June banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said. A total of 29 lenders may have to meet the requirements, including firms such as Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group Inc., according to plans approved today by the Group of 20 nations.
U.S. banking regulators are also under orders by the Dodd- Frank Act to impose heightened standards on the biggest U.S. banks to curtail systemic risk. Last month, MetLife Inc. (MET), the largest U.S. life insurer, said the Fed rejected its plan to increase its dividend and resume share purchases. The insurer said it will try to sell its banking businesses, thus reducing government oversight.
Tarullo is the Fed’s leading governor on supervisory matters. He has redesigned the central bank’s approach to oversight, centralizing much of the information-gathering and decision-making with the Board of Governors and subjecting it to more rigorous and horizontal analysis by multiple Fed departments.
Central bank regulators are gearing up for another capital plan review, a process where they ask bank boards and management at the biggest banks to submit plans for capital distribution or accumulation over the next several quarters.
The Fed will expect banks that will need to comply with Basel III “to improve their capital ratios steadily during the transition period through prudent earnings retention policies, even if they already meet any applicable intermediate targets,” Tarullo said. “We will monitor their progress through our review of the capital plans that we require large bank holding companies to submit annually.”
The central bank “will be comfortable with proposed capital distributions only when we are convinced they are consistent with a bank holding company readily and without difficulty meeting the new capital requirements as they come into effect,” Tarullo said in a speech to the American Bar Association.
In a question-and-answer period, Tarullo was asked if the Fed had studied the economic impact of tougher capital standards. He said regulators have to keep in mind the costs of not supervising correctly. The economy still struggles with 9 percent unemployment more than two years after the recession induced by the financial crisis has ended.
“It would be hard for you to find an American citizen who wants another” bailout, Tarullo said. “I think they share the view that there should be no more government bailouts of large financial institutions.”
U.S. stocks fell, driving the Standard & Poor’s 500 Index to its first weekly decline since September, as concern about European financing offset an unexpected decrease in the American unemployment rate. The S&P 500 dropped 0.6 percent to 1,253.23 as of 4 p.m. New York time, after falling as much as 1.8 percent earlier. Treasury 10-year yields fell to 2.04 percent from 2.07 percent late yesterday.
The Basel committee has said internationally active banks should hold core Tier 1 capital of 7 percent of their risk- weighted assets. Surcharge requirements are for banks it considers systemically important financial institutions, or those whose collapse would harm the global economy.
The systemic importance of a bank will be assessed by measuring its complexity, amount of global activity and their degree of linkages with other financial institutions, the Basel group said.
Tarullo also said that regulators need to focus on short- term dollar funding markets that provide liquidity to foreign banks in good times and can also show rapid contraction in times of stress.
“We in the United States need to move forward with changes to money market funds and triparty repo markets to ensure that they do not serve as a trigger for wholesale funding runs,” Tarullo said.
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