In testimony before the Senate Banking Committee on February 6, FRB Governor Daniel Tarullo set forth the FRB’s top regulatory priorities for 2014. While Governor Tarullo noted the recent progress in implementing the mandates in the Dodd-Frank Act, he also highlighted the areas necessitating greater work, including the “problems of ‘too-big-to-fail’ and systemic risk.”
Overviewing progress on a number of Dodd-Frank reforms, Governor Tarullo first discussed a proposed rule issued by the FRB and other Federal banking agencies in October 2013, which aims to create the first broadly applicable quantitative liquidity requirement for U.S. banking firms (the “Proposed Liquidity Rule”) (which was discussed in the October 29, 2013 Financial Services Alert). Governor Tarullo stated that the Proposed Liquidity Rule is more stringent than the international standard proposed by the Basel Committee in the range of assets that will qualify as high-quality liquid assets and the assumed rate of outflows for certain kinds of funding. He also reported that the Proposed Liquidity Rule is on an accelerated phase-in period that is shorter than the Basel Committee’s standard.
Governor Tarullo also discussed several proposed rules that the FRB expects will be finalized in the near term. He stated that proposed rules for enhanced prudential standards for large U.S. and foreign banking firms with total global consolidated assets of $50 billion or more will be finalized shortly, and will include liquidity requirements, risk-management requirements, single-counterparty credit limits, and an early remediation regime. Governor Tarullo further noted that Federal banking agencies expect to strengthen the Basel III supplemental leverage ratio in the coming months. This would require bank holding companies with more than $700 billion in consolidated total assets, or $10 trillion in assets under custody, to maintain a Tier 1 capital leverage buffer of at least 2 percent above the minimum Basel III supplementary leverage ratio requirement of 3 percent, for a total of 5 percent. Governor Tarullo also stated that the orderly liquidation authority proposed rule is a key priority. He noted that the FRB is currently consulting with the FDIC on a proposal that would require the largest, most complex U.S. banks to maintain a minimum amount of long-term unsecured debt outstanding at the holding company level. He stated that the FRB believes that while minimum capital requirements help to cover losses, if a troubled large institution’s failure is imminent, successful resolution without taxpayer assistance would be best achieved if the institution has sufficient, long-term, unsecured debt to absorb additional losses and to recapitalize the business transferred to a bridge operating company.
Governor Tarullo also discussed the risks from the “shadow banking” system as well as the FRB’s expectations regarding information security at financial institutions.