By Emily Stephenson and Douwe Miedema
WASHINGTON May 3 Banks' limits on how much they
can borrow should be tighter than what is called for under a
global pact, a top Federal Reserve official said, as calls to
cut the size of the largest banks continue.
Fed Governor Daniel Tarullo said that the limit, known as a
leverage ratio, may have been set too low in Basel III, a
worldwide agreement aimed at making banks safer after the
devastating 2007-09 financial crisis.
"The new Basel III leverage ratio ... may have been set too
low," said Tarullo, the Fed's regulation czar, adding that the
central bank could use its powers to "set a higher leverage
ratio for the largest firms."
The debate about too-big-to-fail banks - which are perceived
as implicitly relying on taxpayers to bail them out no matter
how risky their business conduct - has heated up in Washington
in the last few weeks.
Critics of Basel III, including many regulators, have said
it is too easy on the banks, and that it relies too much on
letting banks use complex calculations to determine how much
equity they should hold.
Many of the signatories of Basel III across the world, the
Fed included, have missed the January deadline set by global
leaders to introduce the global pact.
Tarullo expected the rules that the Fed is drawing up with
two other regulators - the Federal Deposit Insurance Company and
the Office of the Comptroller of the Currency (OCC) - to come
out in the next couple of months.
Under Basel III, the leverage ratio stands at 3 percent.
Tarullo declined to say by how much it should go up.
Two senators, Sherrod Brown and David Vitter, have
introduced a bill that would set the leverage ratio for the
biggest banks at 15 percent, a requirement so onerous that it
could force them to carve up their businesses.
GovTrack, a website that calculates the likelihood of U.S.
laws being adopted, attributes only a 1 percent chance to the
proposal becoming law. Still, the bill has caused a flurry of
headlines, and is hotly debated.
Banks complain equity is the most expensive way to fund
their business, but it is the safest from a taxpayer's or a
regulator's perspective. That is because shareholders are the
first to lose their money in case of bankruptcy.
Tarullo also said he favoured 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.
The main threat to bank stability was their reliance on
short-term funding, Tarullo said, suggesting that big banks
could be allowed to hold less capital than their peers if they
relied less on short-term funding.