US Fed's Tarullo calls for higher bank capital levels

WASHINGTON Fri May 3, 2013 2:15pm EDT

WASHINGTON May 3 (Reuters) - U.S. regulators could order the biggest banks to ramp up their capital holdings beyond what is called for under an international agreement, a top Federal Reserve official said on Friday.

Fed Governor Daniel Tarullo said in a speech that the leverage ratio - which limits the amount of money a bank can borrow to fund its business - established by the international agreement, known as Basel III, may have been too low.

"To me, at least, the important question is not whether capital requirements for large banking firms need to be stronger than those included in Basel III and the agreement on capital surcharges, but how to make them so and with what specific risks in mind," he said.

The proposal comes as the Federal Reserve and other bank regulators finalise U.S. rules to implement the global Basel III capital accord, which was crafted in the wake of the devastating 2007-09 financial crisis.

A number of U.S. and international regulators have since criticized the agreement as too easy on the banks or said it relies too much on letting banks use complicated calculations of the riskiness of their assets to determine how much capital to maintain.

Many of the signatories across the world, the Fed included, have missed the January deadline set by global leaders for introducing these tougher rules to make banks safer. The Fed has indicated it will introduce the rules this year.

Tarullo said he expected the final U.S. version to be released in the next few months. He declined to specify how high regulators should set the leverage ratio for the biggest banks.

U.S. regulators have said a section of the 2010 Dodd-Frank law that authorizes them to impose tougher restrictions on the biggest, most interconnected banks would allow them to significantly ramp up capital requirements for those firms.

Tarullo also said on Friday that regulators are leaning toward setting minimum requirements for how much long-term debt banks must hold. This debt buffer, which could be converted to equity if the bank failed, would absorb losses in case of financial trouble, he said.

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