Federal Reserve Governor Daniel Tarullo said on Thursday that the central bank’s activities in 2013 will be centered on the continued implementation of Dodd-Frank and Basel III, development of banking supervision, improvement of large bank resolvability and reduction of systemic risk in the shadow banking system.
In December 2010, the Basel Committee on Banking Supervision released the Basel III standards on capital requirements, and federal regulators issued a set of proposals last year to implement the rules for large, international U.S. banking firms.
“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,” Tarullo said in prepared testimony before the Senate Committee on Banking, Housing and Urban Affairs. “I think there is a widespread view that the proposed rules erred on the side of too much complexity. The three banking agencies are carefully considering these and all comments received on the proposal and hope to finalize the rule-making this spring.”
Tarullo said that the Federal Reserve will work toward the finalization of proposals to implement portions 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,” Tarullo said. “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.’”
Tarullo also said that the Federal Reserve plans to reorient its focus to more closely examine systemic risks and has strengthened its supervision of large banking firms.
“Within the Federal Reserve, the Large Institution Supervision Coordinating Committee 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,” Tarullo said. “One major supervisory exercise conducted by the LISCC each year is a Comprehensive Capital Analysis and Review of the largest U.S. banking firms. Building on supervisory work coming out of the crisis, CCAR was established to ensure that each of the largest U.S. bank holding companies (one) has rigorous, forward-looking capital planning processes that effectively account for the unique risks of the firm and (two) maintains sufficient capital to continue operations throughout times of economic and financial stress. CCAR, which uses the annual stress test as a key input, enables the Federal Reserve to make a coordinated, horizontal assessment of the resilience and capital planning abilities of the largest banking firms and, in doing so, creates closer linkage between micro-prudential and macro-prudential supervision. Large bank supervision at the Federal Reserve will include more of these systematic, horizontal exercises.”
Additionally, Tarullo said that a number of steps involving “shadow banking,” in particular, can be taken to improve the resilience of the financial system.
“First, the regulatory and public transparency of shadow banking markets, especially securities financing transactions, should be increased,” Tarullo said. “Second, additional measures should be taken to reduce the risk of runs on 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. Although an industry-led task force made some progress on these issues, the Federal Reserve concluded that important problems were not likely to be successfully addressed in this process and has been using supervisory authority over the past year to press for further and faster action by the clearing banks and the dealer affiliates of bank holding companies.”