Reuters: Regulatory News: Fed's Yellen: big banks may need more capital than Basel requires

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Fed's Yellen: big banks may need more capital than Basel requires Jun 3rd 2013, 01:50 SHANGHAI, June 3 | Sun Jun 2, 2013 9:50pm EDT SHANGHAI, June 3 (Reuters) - Tougher borrowing limits may be needed for too-big-to-fail banks, the No. 2 official at the Federal Reserve said on Monday, adding her voice to a growing chorus of U.S. regulators looking to go beyond internationally agreed standards in the wake of the 2007-2009 financial crisis. Fed Vice Chair Janet Yellen, the presumed front-runner to succeed Chairman Ben Bernanke when his term expires early next year, warned in a speech in China about the "unfinished business in global financial regulatory reform." She also highlighted the so-called shadow banking industry - including triparty repurchase agreement markets, or repos, and money market mutual funds - as an area that remains vulnerable and in need of new rules. But Yellen's comments on systemically important financial institutions, or SIFIs, come as U.S. regulators and politicians are upping the ante on such massive and complicated banks, beyond even the international Basel III capital requirements. "I'm not convinced that the existing SIFI regulatory work plan, which moves in the right direction, goes far enough," Yellen was to tell the International Monetary Conference, according to prepared remarks. "Fully offsetting any remaining too-big-to-fail subsidies and forcing full internalization of the social costs of a SIFI failure may require either a steeper capital surcharge curve (than Basel III requires), or some other mechanism for requiring that additional capital be held by firms that potentially pose the greatest risks," she added. Yellen's remarks echo those of the central bank's regulation guru Daniel Tarullo, a Fed governor who a month ago said capital requirements should be higher than Basel's 3-percent leverage ratio. Yellen did not comment on monetary policy. However one risk of the Fed's massive bond-buying program - which has swelled its balance sheet to some $3.2 trillion - is that it will prompt excessive risk-taking and destabilize financial markets. Bernanke told U.S. lawmakers last week he had grown "a bit" more concerned about financial stability, including the possibility that the monetary accommodation could be inflating asset-price bubbles. Turning to shadow banking, Yellen said some repo transactions "create sizable macroprudential risks," and argued reforms are needed to reduce the risk of runs and to increase transparency in the market. Repos are a prime source of short-term bank funding and are backed by Treasuries or riskier collateral, including mortgage-backed debt. Yellen proposed raising bank and broker-dealer capital or liquidity requirements on some of these transactions, or imposing minimum margin requirements. She also urged global regulators to "focus significant amounts of energy now" to fix shadow banking. Link this Share this Digg this Email Reprints

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