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Bernanke Says Too-Big-to-Fail Banks May Face New Capital Demands

July 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said banks could face further demands for capital if the latest efforts still leave the financial system vulnerable to a failure by one of the biggest firms.

“There’s probably more scope for capital if we’re not comfortable with the status of these firms,” Bernanke told a Senate Banking Committee hearing today, addressing efforts to end the idea that some lenders are “too big to fail.”

U.S. regulators approved tougher rules this month that affirm global minimums for capital and leverage, and proposed a higher threshold for eight of the nation’s largest lenders. The leverage ratios, which call for capital equal to 5 percent of assets at parent companies and 6 percent for their banking units, are designed to prevent a repeat of 2008’s credit crisis.

When asked whether soaring second-quarter profits, such as the 42 percent jump reported by Citigroup Inc., demonstrate that banks are taking big risks in trading again, Bernanke said regulators are “quite aware of these portfolios.” The Fed is using capital rules, stress tests and limits on proprietary trading to curb banks, he said, and if those efforts don’t quell concerns, “additional steps would be appropriate.”

Senator Elizabeth Warren, a Massachusetts Democrat, asked whether he agreed with Treasury Secretary Jacob J. Lew’s comment yesterday that too big to fail should be ended by this year or “other options” would be warranted. Bernanke suggested more leeway on that timing.

“Maybe I’d take another year from now,” Bernanke said.

The chairman echoed remarks this week from Fed Governor Daniel Tarullo, who said regulators should focus on protections around banks’ reliance on certain types of wholesale funding, and that further capital requirements could help.

“The big area I think we need to do more on is short-term funding,” Tarullo, the Fed governor responsible for financial regulation, said at a July 15 event. Letting a bank lean heavily on transactions such as repurchase agreements could “make the institution and the system susceptible to runs” of the kind that toppled Bear Stearns Cos. and Lehman Brothers Holdings Inc., he said.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.

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