Bloomberg News

Tarullo Says Fed Responding to Banks’ Concerns on Payouts

November 22, 2011

(Updates with comment in 14th paragraph.)

Nov. 9 (Bloomberg) -- The Federal Reserve will address some banks’ concerns that they may not be allowed under new rules to provide shareholder payouts as they wish, Governor Daniel Tarullo said.

The regulation will probably “respond to the concern of some firms that the timing of the first capital planning process did not provide for appropriate capital distributions in the first quarter of the succeeding calendar year,” Tarullo said in New York today. The Fed is “close to issuing” the regulation, a final version of a June proposal, he said.

U.S. regulators are required under the Dodd-Frank financial overhaul legislation to impose heightened standards on the biggest U.S. banks to curtail systemic risk. Last month, MetLife Inc., the nation’s largest life insurer, said the Fed rejected its plan to increase its dividend and resume share purchases. The insurer said it will try to sell its banking businesses, thus reducing government oversight.

Central bank regulators are gearing up for another capital plan review, a process that includes stress testing and the submission by boards and management at the biggest banks of plans for capital distribution or accumulation over the next several quarters.

“The comments received on the proposed regulation issued in June have been useful in crafting the final rule,” which extends formal capital planning to all bank holding companies with at least $50 billion in assets, Tarullo, the Fed’s leading governor on supervisory matters, said at a business meeting and conference hosted by the Clearing House, a group of major banks.

Next Review

Documentation for the next review will be more specific on “what constitutes the kind of material change in the risks faced by a firm, such that a supplemental capital plan would be needed during the course of the year,” said Tarullo, 59, who was President Barack Obama’s first appointee to the central bank in 2009.

U.S. stocks remained lower after Italian bond yields surged to euro-era records. The Standard & Poor’s 500 Index fell 3.1 percent to 1,236.43 at 1:58 p.m. in New York.

Tarullo said regulation of banks’ capital “remains the single most important element of prudential financial regulation” without being “sufficient” on its own to ensure a sound financial system.

Too Big to Fail

Banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis, global regulators said in June. The additional capital buffers will range from 1 percentage point to 2.5 points, the Basel Committee on Banking Supervision said.

A total of 29 lenders may have to meet the requirements, including Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group Inc., according to plans approved last week by the Group of 20 nations.

Tarullo said the list “will not be used to determine any bank’s surcharge.” Instead, the list of banks and “surcharge buckets” will be based on data collected in 2014, he said, reiterating a point he made in a Nov. 4 speech.

The Basel committee has said internationally active banks should hold core Tier 1 capital of 7 percent of their risk- weighted assets. Surcharge requirements are for banks it considers systemically important financial institutions, or those whose collapse would harm the global economy.

The systemic importance of a bank will be assessed by measuring its complexity, amount of global activity and their degree of linkages with other financial institutions, the Basel group said.

‘Somewhat Higher’

“We, being the Fed, would have liked to see Basel III somewhat higher,” Tarullo said in response to audience questions after the speech, referring to capital requirements.

“There’s a growing consensus” that capital standards should be implemented around the world “in a reasonably consistent fashion,” he said.

Tarullo has redesigned the central bank’s approach to oversight, centralizing much of the information-gathering and decision-making with the Board of Governors and subjecting it to more rigorous and horizontal analysis by multiple Fed departments.

--Editors: James Tyson, Kevin Costelloe

To contact the reporters on this story: Scott Lanman in New York at slanman@bloomberg.net Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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