By Jonathan Spicer
NEW YORK May 9 A top Federal Reserve official
on Thursday gave only lukewarm support to a fresh drive by
regulators to increase capital at big banks, arguing capital
buffers are important but just how much more is needed remains
up for debate.
Jeffrey Lacker, president of the Richmond Federal Reserve,
said that broker dealers "deserve special attention" in this
debate. Some of his colleagues, including Boston Fed President
Eric Rosengren, have suggested requiring higher capital at such
"I do favor increasing capital and I've been in favor of the
broad upswing in capital that we have seen," Lacker said of bank
holding companies. "Whether we need more or not, I think we're
sorting through that as a regulatory community and as a
financial community," he told the Council on Foreign Relations
in New York.
"I certainly see great advantages in larger capital
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.
Some regulators and other critics of the Basel III
international agreement to protect against another global
financial crisis have said it is too easy on banks, and that it
relies too much on letting banks use complex calculations to
determine how much equity they should hold.
Lacker said that requiring banks to hold more debt that
converts into equity when the firms get into trouble, an idea
backed by Fed Governor Daniel Tarullo, is one way to ramp up
capital though perhaps not the best.
"Convertible debt is a clever way of taking advantage of the
tax subsidy for debt with an equity-like instrument," he said.
"At the end of the day, yes, if that provides a greater
buffer, fine, but I don't think we should be focused ... on
incentives at the holding company level."
But regulators need a plan for when that capital dries up,
Lacker said, reiterating that more should be done to ensure such
large firms can be safely wound down if they get into trouble.
Lacker said the "living wills" program will need more "hard
work and detailed analysis" so that bankruptcies can take place
without the U.S. government stepping in to bail out banks as it
did in the 2008 financial crisis.
"I see no other way to reliably identify exactly what
changes are needed in the structure and operations of financial
institutions to end 'too-big-to-fail'," Lacker said.