Bloomberg News

Tarullo Says Capital Best Way to Avert Taxpayer Bailouts

December 13, 2011

(Updates with Tarullo comments on surcharge in eighth paragraph.)

Dec. 6 (Bloomberg) -- Federal Reserve Governor Daniel Tarullo said banks need to build sufficient reserve capital to avert taxpayer-funded bailouts similar to the Troubled Asset Relief Program.

“The best way to avoid another TARP is for our large regulated institutions to have adequate capital buffers, reflecting the damage that would be done to the financial system were such institutions to fail,” Tarullo said today in testimony to the Senate Banking Committee.

The TARP is a $700 billion fund created by the government to backstop bank capital and financial institutions in the aftermath of the U.S. financial crisis caused by rising defaults on home loans.

The Dodd-Frank Act requires the Fed to impose stricter capital standards for U.S. banks with total assets of $50 billion or more. In addition, the Basel Committee is establishing a surcharge for global banks with a large systemic footprint.

“No decision has yet been made” on whether the tougher capital guidelines for large U.S. banks that are not on the global bank list “will be in the form of a quantitative surcharge,” Tarullo said.

“Analysis of the systemic footprints of these other U.S. bank holding companies suggests that even if surcharges were to apply, their amounts would be quite modest,” he said.

Capital Surcharge

In a question-and-answer session with Senator Jeff Merkley, an Oregon Democrat, Tarullo said that he preferred a higher capital surcharge than the 2.5 percentage points agreed upon by international regulators in Basel, Switzerland, this year.

“Personally I would have been a little happier with a little higher number,” Tarullo said. Still, the 2.5 percentage point surcharge was “well within that range which analytically we think will provide that kind of additional buffer support.”

The Basel Committee on Banking Supervision agreed earlier this year that global banks such as Goldman Sachs Group Inc. and Deutsche Bank AG whose failure could send shock waves throughout the financial system should apply a systemic risk surcharge of 1 percentage point to 2.5 percentage points. Banks could face an additional one point charge if they grew even larger.

Tarullo took office at the Board of Governors in January 2009. He is the governor in charge of banking supervision and regulation, and has overseen an overhaul of the Fed’s approach to oversight.

--Editors: James Tyson, Vince Golle

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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


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