U.S. planning tougher-than-Basel capital standards, Tarullo says

WASHINGTON – The Federal Reserve is planning risk-based capital standards for banks that are tougher than those developed by their international counterparts, Fed Governor Daniel Tarullo will tell lawmakers Tuesday.
The U.S. capital surcharge for large banks will be higher than the level required by the 27-nation Basel Committee on Banking Supervision, Tarullo said in testimony for the Senate Banking Committee. The surcharge formula will take into account U.S. banks’ reliance on short-term wholesale funding, he said.
“The financial crisis made clear that policymakers must devote significant attention to the potential threat to financial stability posed by our most systemic financial firms,” he said in his statement.
Tarullo, the Fed governor responsible for financial regulation, will testify alongside top officials from five other agencies at a hearing on their implementation of the Dodd-Frank Act. His comments reflect regulators’ focus on the largest, most systemically important companies as they near completion of rulemaking required by the 2010 law.
“We believe the case for including short-term wholesale funding in the surcharge calculation is compelling, given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm’s solvency and impose externalities on the broader financial system,” Tarullo said.

Proposed modifications

The Fed will propose modifications to the net stable funding ratio adopted in the Basel rules to boost liquidity requirements when banks provide short-term funding to other market participants, according to Tarullo.
In addition to Tarullo, senators will hear testimony from the heads of the Federal Deposit Insurance Corp., Office of Comptroller of the Currency, Securities and Exchange Commission, Commodity Futures Trading Commission and Consumer Financial Protection Bureau.
U.S. regulators last week adopted two rules that make new demands on bank liquidity and capital, a re-proposal of a rule on swaps margin and the OCC’s new policy on how banks must manage risk. One key measure sets requirements for the amount of high-quality, liquid assets big banks must stockpile to survive a 30-day liquidity drought.
In their prepared remarks, the heads of the FDIC, OCC and CFTC said regulators also will be devoting attention to cybersecurity in the wake of breaches affecting companies including JPMorgan Chase & Co. FDIC Chairman Martin Gruenberg said the agencies will review gaps to “enhance supervisory polices” and work together to analyze emerging threats.

‘Period examinations’

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“The CFTC conducts periodic examinations that include review of cyber-security programs put in place by key market participants, and there is much more we would like to do in this area,” CFTC Chairman Tim Massad said in his statement. “The Commission’s examination expertise will need to be expanded to keep up with emerging risks in information security, especially in the area of cybersecurity.”
Comptroller Thomas Curry said the OCC is focused on finishing a multiagency rule to ensure financial-firm bonuses don’t encourage dangerous risk.
“The completion of this rule is an OCC priority because of the impact that poorly structured incentive compensation can have on risk-taking behaviors and the overall safety and soundness of an institution,” Curry said his statement.

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