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Daniel K. Tarullo, a Star Regulator at the Fed ...
June 16, 2011
Tarullo Urges Global Regulators to Align Standards for Risk
Federal Reserve Governor Daniel Tarullo called on global bank regulators to better align capital standards to risks in bank portfolios worldwide.
Fed officials and supervisors from other nations are setting up new benchmarks for bank capital in an accord known as Basel III. Previous agreements haven’t shown “rigorous and consistent application by supervisors and firms across countries,” Tarullo said. Loopholes in the future could lead to “a competitive race to the bottom.”
“Taking action to more closely align capital requirements for similar risk exposures across countries will take concerted work within the Basel Committee,” Tarullo said in remarks prepared for a hearing tomorrow before the House Financial Services committee. A copy of the testimony was obtained by Bloomberg News.
Regulators are boosting capital levels for banks to avert future taxpayer funded bailouts. Basel officials agreed last year to raise the common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.
“The recent financial crisis exposed significant weaknesses in the regulatory capital requirements for large banking institutions,” Tarullo said. “In some cases, especially for holdings of asset-backed securities in the trading books of the largest banks, it was evident that capital requirements were set far too low.”
Industry Officials
Tarullo is scheduled to testify with Sheila Bair, chairman of the Federal Deposit Insurance Corp., and John Walsh, acting Comptroller of the Currency. Legislators will also seat a second panel including industry officials.
Bankers have criticized proposals for raising capital requirements, saying they threaten to constrain lending and economic growth. The U.S. economy is expanding at a 2.5 percent annual rate in the current quarter, according to the median estimate of economists surveyed by Bloomberg News. That hasn’t been fast enough to reduce unemployment, which rose to 9.1 percent last month from 9 percent in April.
“The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth,” JPMorgan Chase & Co. (JPM) Chief Risk Officer Barry Zubrow said in testimony prepared for delivery tomorrow.
Tarullo indicated that U.S. banks may be at a disadvantage if risk weightings aren’t applied evenly worldwide.
“Analysts have pointed out that large U.S. banks generally have markedly higher average risk weights, ratios of risk- weighted assets to total assets, and ratios of common equity to total assets, adjusted for differences in accounting, than some of their foreign competitors,” Tarullo said. “These large disparities cannot be easily explained away through differences in risk profiles, which are largely similar within the business lines of competing banks.”
http://www.bloomberg.com/news/2011-06-15/fed-s-tarullo-urges-global-regulators-to-align-risk-standards.html
