By Steven C. Johnson
NEW YORK, April 3 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
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 U.S.
holding companies. The biggest banks would also need to hold
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 U.S. 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
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
"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."
FED STIMULUS STILL NEEDED
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.