In a speech today before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate, Federal Reserve Governor Daniel Tarullo will outline key priorities for the Federal Reserve in 2013 including work on Basel III, Dodd-Frank 165 and Shadow Banking. Excerpts from the speech are below.
Regulation of Foreign Banks in the US
[A Federal Reserve] proposal generally would require foreign banks with a large U.S. presence to organize their U.S. subsidiaries under a single intermediate holding company that would serve as a platform for consistent supervision and regulation. The U.S. intermediate holding companies of foreign banks would be subject to the same risk-based capital and leverage requirements as U.S. bank holding companies. In addition, U.S. intermediate holding companies and the U.S. branches and agencies of foreign banks with a large U.S. presence would be required to meet liquidity requirements similar to those applicable to large U.S. bank holding companies.
Implementing Basel III and Dodd-Frank 165 and 166
Given the centrality of strong capital standards, a top priority this year will be to update the bank regulatory capital framework with a final rule implementing Basel III and the updated rules for standardized risk-weighted capital requirements.
The Federal Reserve also intends to work this year toward finalization of its proposals to implement the enhanced prudential standards and early remediation requirements for large banking firms under sections 165 and 166 of the Dodd-Frank Act. As part of this process, we intend to conduct shortly a quantitative impact study of the single-counterparty credit limits element of the proposal. Once finalized, these comprehensive standards will represent a core part of the new regulatory framework that mitigates risks posed by systemically important financial firms and offsets any benefits that these firms may gain from being perceived as “too big to fail.”
The Federal Reserve will be working to propose a risk-based capital surcharge applicable to systemically important banking firms.
Another proposed rulemaking will cover implementation by the three federal banking agencies of the recently completed Basel III quantitative liquidity requirements for large global banks. The financial crisis exposed defects in the liquidity risk management of large financial firms, especially those which relied heavily on short-term wholesale funding. These new requirements include the liquidity coverage ratio (LCR), which is designed to ensure that a firm has a sufficient amount of high quality liquid assets to withstand a severe standardized liquidity shock over a 30-day period. The Federal Reserve expects that the U.S. banking agencies will issue a proposal in 2013 to implement the LCR for large U.S. banking firms.
Within the Federal Reserve, the Large Institution Supervision Coordinating Committee (LISCC) was set up to centralize the supervision of large banking firms and to facilitate the execution of horizontal, cross-firm analysis of such firms on a consistent basis…. One major supervisory exercise conducted by the LISCC each year is a Comprehensive Capital Analysis and Review (CCAR) of the largest U.S. banking firms…. Large bank supervision at the Federal Reserve will include more of these systematic, horizontal exercises.
Since the passage of the Dodd-Frank Act, the FDIC has been developing a single-point-of-entry strategy for resolving systemic financial firms under the OLA. As explained by the FDIC, this strategy is intended to effect a creditor-funded holding company recapitalization of the failed financial firm, in which the critical operations of the firm continue, but shareholders and unsecured creditors absorb the losses, culpable management is removed, and taxpayers are protected. Key to the ability of the FDIC to execute this approach is the availability of sufficient amounts of unsecured long-term debt to supplement equity in providing loss absorption in a failed firm. In consultation with the FDIC, the Federal Reserve is considering the merits of a regulatory requirement that the largest, most complex U.S. banking firms maintain a minimum amount of long-term unsecured debt. A minimum long-term debt requirement could lend greater confidence that the combination of equity owners and long-term debt holders would be sufficient to bear all losses at the consolidated firm, thereby counteracting the moral hazard associated with taxpayer bailouts while avoiding disorderly failures.
Shadow Banking Initiatives
First, the regulatory and public transparency of shadow banking markets, especially securities financing transactions, should be increased. Second, additional measures should be taken to reduce the risk of runs on money market mutual funds. The Council recently proposed a set of serious reform options to address the structural vulnerabilities in money market mutual funds. Third, we should continue to push the private sector to reduce the risks in the settlement process for tri-party repurchase agreements.