Tougher than Basel? U.S. May Have Company, Fed's Tarullo Says

WASHINGTON — The U.S. is not the only country where regulators are considering going farther than Basel III in setting higher capital requirements, a key Federal Reserve Board official said Monday.

Daniel Tarullo, the Fed governor responsible for bank supervision and regulation, said other jurisdictions are coming to a similar conclusion that the Basel III reforms — unveiled in late 2010 — were insufficient. Specifically, he said, foreign regulators — like U.S. agencies — are beginning to view the levels outlined in the agreement for a required leverage ratio and special capital surcharge at the largest banks as too weak.

There is a "latent concern that exists among a lot of other regulators" that a capital surcharge for systemically important banks, and most especially, the leverage ratio requirement were "significantly lower than might have been optimal," Tarullo said at an event hosted by Politico.

"There is interest that people are showing in additional measures," he said.

Under the Basel III agreement, all U.S. banks will have to meet at least a 4% leverage requirement. Those deemed "systemically important banks" by the Basel Committee on Banking Supervision will also face an additional supplemental leverage ratio of 3% along with a capital surcharge of anywhere between 1% and 2.5%. (Tarullo recently said U.S. regulators plan to propose their version of a capital surcharge in the fall.)

Tarullo and other U.S. regulators negotiating the international Basel III accord had pushed for a much higher capital buffer for the largest, most internationally active banks, but they ultimately settled for a lower threshold in order to reach agreement with foreign counterparts.

Last week, the Fed along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency gave their strongest support yet to stricter standards, formally agreeing that a 3% supplemental leverage ratio for the largest institutions was insufficient. The three agencies proposed instead an additional capital buffer that would effectively raise the leverage ratio to 5% for the eight globally active U.S. firms, and to 6% for their insured depositories.

But in addition to the U.S., Tarullo said, the United Kingdom and Switzerland are examples of other countries where there has been "a good debate" and some "action in increasing capital requirements above what the Basel levels would be."

"We're still in a period of flux, I think, among nations in thinking about how much more do they want to do," said Tarullo. "It may be a few years before we see how the combination of measures across countries stack up with one another."

But Tarullo stressed that the Basel framework has always been about ensuring that internationally active banks meet an absolute minimum for capital levels in order to be safe and sound. Nations maintain the prerogative to strengthen them domestically if they see fit, he said.

It's "very dangerous … to characterize Basel agreements as the ceiling and not the floor," he said.

Tarullo also noted that despite the multilateral efforts, harmonizing global capital rules may not be as critical as ensuring that other standards are in sync across the globe. For example, he said it may be more necessary to coordinate margin requirements among nations to avoid the risk of regulatory arbitrage.

Tarullo said since regulators released their proposal last week on the supplemental leverage ratio, global counterparts have reached out to him to inquire about the rationale behind the decision to increase the proposed requirement.

He revealed that the U.S. regulators, in developing last week's proposal, at one point had discussed requiring different leverage ratios for firms based on their specific "systemic importance" but ultimately determined that that path was "not practical."

The decision to raise the leverage ratio, Tarullo said, was partly rooted in trying to maintain the traditional equanimity between the leverage ratio and risk-based capital ratios. The latter had become more robust under the Basel III package.

"The levels were too low pre-crisis for both risk-weighted and leverage," said Tarullo. "But the idea was to try to raise them and keep that relationship roughly comparable."

Tarullo reiterated his view that the Basel III capital surcharge on the biggest banks, the leverage ratio, and the annual stress tests being undertaken by the U.S. central bank are "important components of a single capital regime." He and other regulators have made the point that a leverage ratio is viewed as a "complement" to the risk-based capital regime.

"Those three things together provide a quite solid base, each of which compensates for the potential shortcomings of the other," Tarullo said last week at a Senate Banking Committee hearing.

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