Chief executive officers of the largest U.S. banks, including JPMorgan Chase & Co. (JPM), will meet with Federal Reserve Governor Daniel Tarullo to discuss the Fed’s stress tests and a proposal to limit credit exposure, according to four people familiar with the meeting.
The CEOs will meet with Tarullo, who has led the Fed’s drive to strengthen oversight of the financial system, at the Federal Reserve Bank of New York on May 2, according to the people, who didn’t want to be named because the meeting isn’t public.
The banks have objected to a proposed 10 percent limit on counterparty risk for the biggest firms, saying it would be unnecessary and hamper their ability to provide liquidity to other banks. They have also said the Fed has failed to explain the assumptions used in the stress tests, intended to determine if banks had enough capital to weather a crisis, and that the Fed didn’t disclose the economic models used in the tests.
“It is simply unfair to ask a bank to pass a test -- and manage towards the standards of that test -- if the parameters are largely unknown or otherwise opaque,” says a letter to the Fed from the Financial Services Roundtable and four other trade groups obtained by Bloomberg News.
JPMorgan Chase CEO Jamie Dimon helped organize the meeting, according to two of the people. Jennifer Zuccarelli, a spokeswoman for JPMorgan, and Barbara Hagenbaugh, a Fed spokeswoman, declined to comment.
The stress tests showed that 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock, the Fed said on March 13. In their letter last week, the five banking trade groups urged the Fed to make public the design of models used in the tests and explain their economic assumptions.
The letter also objected to a proposed 10 percent limit for credit risk between a company considered systemically important and a counterparty when each has more than $500 billion in total assets. The 10 percent limit, part of a Fed proposal to apply tougher standards to banks whose collapse could jeopardize the economy, is more restrictive than a 25 percent limit in the Dodd-Frank financial overhaul law.
“The Federal Reserve has provided no basis to determine that imposing the dramatically lower and arbitrary 10 percent credit limit on certain major covered companies would even help mitigate risks to the U.S. financial stability, much less be necessary,” the letter says. The groups also say the Fed’s model for calculating exposure overstates their risk.
Signers of Letter
The signers of the letter include the Clearing House Association, the Financial Services Roundtable, the Securities Industry and Financial Markets Association, the Financial Services Forum and the American Bankers Association. The Clearing House Association represents Citigroup Inc., and Bank of America Corp. (BAC) and JPMorgan.
The Fed has argued that the limit on counterparty risk is needed to protect the financial system in a crisis.
“The financial crisis also revealed inadequacies in the U.S. supervision approach to single counterparty credit concentration limits, which failed to limit the interconnectedness among and concentration of similar risks within large financial companies that contributed to a rapid escalation of the crisis,” the Fed said in its December proposal.
Executives of the eight largest banks met with Tarullo on March 27, according to a Fed disclosure. The Fed’s proposed rules would set triggers for regulatory enforcement for systemic firms and require boards of directors to oversee and approve plans for limiting liquidity risk. Comments on the Fed’s proposal are due today.
To contact the editor responsible for this story: Christopher Wellisz at firstname.lastname@example.org