Fed's Tarullo says focused on big bank reliance on wholesale funding

WASHINGTON Thu Apr 18, 2013 9:29am EDT

Federal Reserve Board Governor Daniel Tarullo testifies before the Senate Banking, Housing and Urban Affairs Committee in Washington February 14, 2013. REUTERS/Gary Cameron

Federal Reserve Board Governor Daniel Tarullo testifies before the Senate Banking, Housing and Urban Affairs Committee in Washington February 14, 2013.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) - Federal Reserve Board Governor Daniel Tarullo said on Thursday that U.S. banks were in better shape now than prior to the financial crisis, but he remained worried by the vulnerability of the very big firms to reliance on fickle market liquidity.

"My concern in particular is the intersection of 'too big to fail' with very large institutions, with very large wholesale funding markets that are subject to runs, and eventually then to liquidity freezes," he told Bloomberg Television in an interview.

New financial rules being policed by the Fed and other regulators have imposed tougher capital and liquidity standards to prevent a re-run of the crisis that led to the collapse of investment bank Lehman Brothers in 2008. The Fed now conducts annual stress tests to make sure big banks are in good health.

Asked why Goldman Sachs (GS.N) and JPMorgan Chase (JPM.N) were instructed last month by the Fed to fix flaws in how they determine capital payouts to shareholders, but their plans for share buy-back's and dividends were still approved, Tarullo said the issues of concern had not been fundamental.

"With respect to Goldman and JP Morgan, we saw some issues which we thought were serious enough to require changes in the near-term, but which did not go to the fundaments of the capital plan," he said.

The review was conducted under the second phase of the Fed's annual stress tests of the 18 largest U.S. banks,

As a governor on the Fed Board in Washington, Tarullo is a point person for financial regulation, but also votes at every policy-setting meeting of the U.S. central bank.

Recent minutes of their last gathering, on March 19-20, revealed that some of his colleagues favored tapering bond purchases in coming months.

But Tarullo signaled he was anxious to avoid a premature exit from the asset buying program, currently running at an $85 billion monthly pace, following disappointing payroll data last month.

"The March numbers...give some pause. But we're going to have to wait to see if that is the anomaly or whether the several preceding months of better growth were the anomaly."

The previous several monthly U.S. job reports had been better than expected, and the slump in March fanned speculation the U.S. economy might suffer another 'spring swoon' following similar setbacks in the last three years.

(Reporting By Alister Bull; Editing by Chizu Nomiyama)

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