Fed’s Rosengren Sees Need for Big Banks to Raise Capital

Federal Reserve Bank of Boston President Eric Rosengren said regulators should require the largest U.S. banks to hold more capital because the government may be unable to rescue them in another financial crisis.

“Minimum standards for large institutions may be too low” given the magnitude of losses at the biggest banks during the crisis beginning in 2008, Rosengren said in to remarks prepared for a speech today at a Bank for International Settlements conference on financial regulation in Seoul. “Government authorities don’t want to be in a position of having to provide support again, and in fact, might not be able to so.”

Under the overhaul of global financial rules, known as Basel III, banks need to increase capital to avert turmoil similar to the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. While standards for the U.S. haven’t been finalized, systemically important U.S. financial institutions, or SIFIs, probably will be required to set aside additional capital, Rosengren said.

Boston Fed researchers found that half of large banks, if they maintained a tier 1 common equity ratio of at least 7 percent, would have remained above the 5 percent ratio during the most severe part of the crisis, Rosengren said. Regulators view tier 1 capital as the most important for loss absorption because it is composed of common stock and retained earnings.

Eight of the 26 banks studied would have had capital losses that exceeded the maximum level proposed by the buffer known as the “SIFI surcharge,” Rosengren said. That would have caused their capital levels to fall below the 5 percent tier 1 ratio used in the Fed’s stress tests of whether they could withstand a severe economic contraction, he said.

“This highlights that while the capital buffers should provide significantly greater capital than was held prior to the crisis, the capital buffers do not seem excessive given the losses experienced during the financial crisis,” Rosengren said.