Federal Reserve Gov. Daniel Tarullo says big banks classified as too-big-to-fail financial institutions face a steady roll out ahead as they work through the six-year process of setting up capital structures to comply with Basel III compliance levels, which begin Jan. 1, 2013.
Fed Gov. Tarullo expects banks to modify Basel requirements
"While the Federal Reserve intends to ensure that firms are on a steady path to full Basel III compliance, we do not intend to require firms to raise external capital or reduce their risk-weighted assets in order to meet any target earlier than at the time specified in the Basel III transition schedule," Tarullo said when speaking to the American Bar Association Banking Law Committee. The Basel III requirements will force bank holding companies subject to the Fed's capital standards to begin taking steps to improve capital ratios. This could include external capital raises, Tarullo said. He added that banking supervisors may force some financial firms to increase their capital ratios above the minimum levels set by Basel I and Basel II to ensure safety and soundness within globally connected financial firms. Tarullo said in the near future, the Federal Reserve will issue new recommendations for changes in the firm's liquidity coverage ratio. This ratio measures the amount of liquid assets a firm has to meet short-term financial obligations. "We have not yet finished developing those recommendations, but I expect that we will, among other things, suggest recalibration of certain deposit run-off and commitment draw-down rates, as well as modification of the buffer definition to place a greater focus on the liquidity characteristics of assets, as opposed to such things as the credit ratings associated with the assets," Tarullo said. "We are also examining how the regulations might be best applied during liquidity stress events to maximize the benefits for financial stability." Write to Kerri Panchuk.