Fed Governor Proposes Higher Capital Surcharge on Big Banks

In an effort to avoid a repeat of the 2008 financial crisis, Fed Governor Daniel Tarullo announced on September 9 to the Senate Banking Committee that the Federal Reserve is planning to impose a capital surcharge on the nation's biggest banks that is higher than that of their international counterparts.

The capital surcharge imposed will be higher than the level set forth by the world's foremost banking regulator, the Basel Committee on Banking Supervision. The surcharge might cause big banks to downsize and take fewer risks, Tarullo said.

"The financial crisis made clear that policy makers must devote significant attention to the potential threat to financial stability posed by our most systemic financial firms," Tarullo said in his testimony.

Tarullo said that banks that rely mostly on short-term wholesale funding will be hit hard by the new surcharge. One analyst, Jaret Seiberg of Guggenheim Securities, said he believes the higher capital surcharge will be "broadly negative" for the big banks because it will cause them to have trouble boosting distributions.

“We believe the case for including short-term wholesale funding in the surcharge calculation is compelling, given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm’s solvency and impose externalities on the broader financial system,” Tarullo said in his testimony.

Tarullo was testifying with other top agency officials before the Senate Banking Committee at a hearing on implementing the Dodd-Frank Reform Act of 2010. The Fed governor outlined a proposal that would tighten capital and liquidity requirements on the nation's biggest financial institutions as the agencies prepare to finalize rulemaking mandated by Dodd-Frank.

"The Federal Reserve has made significant progress in implementing the Dodd-Frank Act and other measures designed to improve the resiliency of banking organizations and reduce systemic risk," Tarullo said. "We are committed to working with the other U.S. financial regulatory agencies to promote a stable financial system in a manner that does not impose a disproportionate burden on smaller institutions."

A list of 29 top banks has been published by global financial regulators. JPMorgan Chase and HSBC were at the top of the most recent list, which was published in November 2013. The capital surcharge for those two institutions would amount to 2.5 percent of their assets under the rule under Tarullo;s proposition.