NEW YORK (Reuters) - Plans to tighten oversight of foreign banks in the United States are crucial for financial security and pose no threat to global banking reform, the Federal Reserve's point person on financial regulation said on Wednesday.
Speaking on CNBC-TV, Fed Governor Daniel Tarullo defended a plan to require all foreign banks to group subsidiaries under a holding company, subject to the same capital standards as holding companies. The biggest banks would also need to hold liquidity buffers.
The plan, part of a drive by the world's largest countries to make banking safer after the 2007-09 financial crisis, has drawn criticism from bankers who fear it will cut profits and make it harder for them to compete for business.
"I understand that banks sometimes don't like to have to increase their capital, but that is something we've required of banks in the United States," Tarullo said.
He said the curbs on foreign banks were "an effort to respond to the financial vulnerabilities that they could pose for us, and which in turn would pose ... for the world."
European banks have been particularly vocal, saying the plan worsens an already fragmented regulatory environment in the European Union, where the industry faces caps on banker bonuses and limits on risky trades.
But Tarullo said about half of foreign bank operations in the United States involve potentially risky proprietary trading, up from 13 percent in 1995.
"It's to take account of those changes that we have to shift the regulatory approach," he said.
U.S. banks are being held to the same strict standards, he added, and the country intends to implement the new Basel III capital rules after regulators fine-tune their plans later this year.
Most U.S. and EU banks meet or exceed the new capital requirements, which won't come into force fully until 2019.
Tarullo said stricter capital requirements were among the steps taken that have made the largest banks less vulnerable to failure and taxpayer-funded bailouts, but "there is more to be done."
"This is a process. It's not a binary matter of a bank being too big to fail or not," he said. "It's a process of building up capital, of the (Federal Deposit Insurance Corporation) continuing to do its very good work in building up its resolution authority and of us addressing the issue of funding."
Turning to monetary policy, Tarullo said the benefits of the Fed's aggressive stimulus efforts still outweighed the costs.
The central bank has said it intends to keep buying mortgage and government bonds at an $85 billion monthly pace until the labor market outlook improved substantially.
In a policy shift late last year, it also committed to keeping interest rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation is not forecast to go above 2.5 percent over a one- to two-year horizon.
The jobless rate was 7.7 percent in February, and economists polled by Reuters expect it to have held there in March.
Recent data showing improvement in housing and hiring have caused some Fed officials to question whether the central bank should taper its asset purchases later this year.
Tarullo acknowledged "a general uptick in economic performance" but noted that similar improvements in job creation over the last few years have been hard to sustain.
Data on Wednesday showed private employers added 158,000 jobs in March, the smallest gain in five months, after boosting payrolls by 237,000 in February.
"What I'd like to see are some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress but at the very least by a nice plateau," he said.
Reporting By Steven C. Johnson; Editing by Neil Stempleman