The Federal Reserve is working on a proposal to raise capital requirements for the biggest U.S. banks, according to the central bank’s point man on financial regulation.
In testimony prepared for a hearing on banking regulations in the Senate Tuesday morning, Fed governor Daniel Tarullo said that among the Fed’s top regulatory priorities was a forthcoming proposal on imposing a capital surcharge on big banks that would limit their reliance on borrowing, a measure meant to guard against crises.
“By further increasing the amount of the most loss-absorbing form of capital that is required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms,” the text of Tarullo’s speech says.
Requiring big banks to hold extra capital is required by the 2010 Dodd-Frank financial reform law and the Basel III international accords on banking regulations, both of which were drafted in the wake of the 2008 crisis to prevent bank failures that threaten to bring down the financial system and require taxpayer bailouts.
Tarullo will say that the Fed’s capital surcharges will go beyond those required by the Basel III rules, “noticeably so for some firms.”
Regulators finished other Basel III capital rules last year, raising required capital as a percent of risk-weighted assets from 4 percent to 6 percent.
In the wake of the recession, banks have roughly doubled their capital levels.
Tarullo did not give a timeline for the proposal in his prepared text.
The eight banks that would be subject to the surcharge are Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.
Tarullo also listed several other regulatory priorities for the Fed, including addressing big banks’ ability to fail without causing system-wide panic by spelling out a viable bankruptcy process beforehand. Living wills, as the plans are known, came to the front of the regulatory agenda in August when the Fed and the Federal Deposit Insurance Corporation said that many big banks had submitted inadequate plans for winding down in case of an emergency.
