The Federal Reserve’s point man on bank regulation, Daniel Tarullo, is calling for big banks who rely on the debt markets for financing to hold more capital, adding to the growing pressure to rein in megabanks.
Tarullo’s proposal comes a week after Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) introduced legislation to impose higher capital requirements on megabanks to make them safer and less dependent on government bailouts.
The ultimate goal of both proposals is the same, but Tarullo is zeroing in on a niche segment of the industry and can move on his plan without congressional action.
Regulators grew concerned during the financial crisis about banks’ dependence on “wholesale funding” — debt used to purchase assets and manage operations. The debt markets froze up during the 2008 financial crisis, forcing banks to sell off assets amid falling prices.
In a speech at the Peterson Institute for International Economics on Friday, Tarullo said the financial system remains vulnerable to the risks of short-term funding shortfalls as megabanks continue to depend on the market. The prominent regulator said the more wholesale funding a bank uses, the more capital it should hold as a buffer against losses.