Facing down bankers unhappy over rising capital requirements, a top regulator defended stronger standards for the biggest financial firms and rejected claims that new rules are adding excessively to market uncertainty.
Federal Reserve Governor Daniel Tarullo said a plan to make large institutions hold more capital will cut the chances of a bank failure that could damage the financial system and hit the global economy. Regulators have said they intend to make the biggest banks increase their loss-absorbing capital by between one and 2.5 percentage points, starting in 2016.Speaking at a lunch organized by the Clearing House, a trade group representing big banks, Mr. Tarullo said the so-called capital surcharge plan could reduce the advantage giant firms derive from market expectations that they would be saved by government overseers, or dubbed "too big to fail."
By eliminating this expectation, the bigger capital buffers could raise borrowing costs for the lenders, possibly pushing some to reduce their size and interconnected nature. "Some banks have changed their profiles materially in the past couple of years," Mr. Tarullo said, "and the prospect of capital surcharges may be an incentive for others to do so as well."
Bankers complain the effort won't reduce risk and will punish profits. "It creates competitive distortions," Adam Gilbert, J.P. Morgan Chase & Co.'s managing director of risk management services, said during a panel discussion. Mr. Gilbert argued that banks expected to be on the final list are similar, and regulators are misguided in trying to differentiate between their relative riskiness.
The comments come after international regulators last week released a list identifying the 29 biggest and most interconnected global banks—including Bank of America Corp., J.P. Morgan, Goldman Sachs Group Inc. and five other U.S. lenders. The list, released by the Financial Stability Board in Basel, Switzerland, didn't specify how much more capital each would have to hold.
The Basel release was based on 2009 data and published "for illustrative purposes," Mr. Tarullo said. He warned that it is early yet to handicap which banks will need to set aside more capital. The list of banks to be covered and how much extra capital each will have to hold will be based on data collected in 2014, he stressed.
"Banks will not know for some time exactly which buckets they will occupy when the surcharge first phases in," Mr. Tarullo said. He said that starting next year, regulators plan to publish an updated list each November based on the preceding year's data. That list will include an indication of which bucket each firm would fall into. Bloomberg News on Tuesday reported on a provisional list showing how much extra capital giant banks could be forced to hold.
The list showed J.P. Morgan and Citigroup Inc. in the 2.5% bucket, meaning that they would each be expected to hold that much more than the estimated minimum to be considered well-capitalized. Each would have to hold Tier 1 common capital—essentially, retained earnings plus common stock outstanding—equivalent to 9.5% of risk-weighted assets when rules take effect. Other banks, including Bank of America, would have to hold less extra capital under this view.