Fed not ‘comfortable’ with GOP’s bank reform plan

Speaking in Washington, Gov. Daniel Tarullo took aim at the plan advanced by House Financial Services Committee chairman Jeb Hensarling to offer banks the ability to opt out of numerous regulations under the law if they maintain a 10 percent capital ratio, based on a very broad measure of capital.

“That 10 percent number would have to be substantially higher to have regulators comfortable,” Tarullo said in response to an audience question about the proposal. The requirement would have to be so high that “one really wonders if that’s the most efficient way,” Tarullo added.

Tarullo is the central bank’s point man on matters of financial regulation, responsible for implementing many of the Dodd-Frank rules. His comments were among the first from the Fed on the Republican proposal.

The Republican proposal would allow banks to escape many far-reaching regulations if they had a 10 percent “leverage ratio,” meaning 10 percent capital against their entire balance sheet. In other words, banks would be required to fund themselves more with ownership stakes, and less on borrowing, which would be limited to 90 percent of their funding.

Today, banks face a number of lower capital requirements, including ones that mandate capital relative to assets weighted by riskiness.

If the risk-weighted requirements were eliminated in favor of a broad leverage ratio, Tarullo said, “banks would be incentivized to move toward riskier assets.” In the 1980s, he argued, when banks faced only a leverage ratio, they did try to “game” the system by taking on riskier assets.

If those risk weights were to be replaced with the kind of standard House Republicans favor, he continued, “it would have to be substantially higher than people are talking about.”

He allowed, however, that community banks should be subjected to much simpler requirements.