The Federal Reserve Board on Tuesday unanimously proposed to set tough capital rules for the eight biggest U.S. banks. The measure would be tougher than an international agreement already in place for large institutions and seeks to press big banks to reduce their 'systemic footprint.'
The new measure is harsher than standards of the Basel Committee on Banking Supervision, which is the primary global rule setter for prudential regulation of big banks. The Fed measure requires the U.S. banks to evaluate how much they rely on short-term wholesale funding as part of their calculation, a consideration that is not included directly in the broader Basel agreement. Other characteristics, which are included in the Basel framework, include size, interconnectedness, cross-jurisdictional activity and complexity.
Nevertheless, the wholesale short-term funding provision in the rule is not surprising. Daniel Tarullo, the top Fed bank supervisor, has suggested in a number of speeches and testimony that the biggest U.S. banks may soon need to hold more capital in the form of common equity to offset concerns about their short-term wholesale funding, a key source of liquidity that dried up during the 2008 financial crisis.
On Tuesday, Tarullo said the tougher restrictions including a short-term wholesale funding provision were put in place because the Fed believes that this kind of funding can leave a firm vulnerable to creditor runs that force a rapid liquidation of positions. That, he suggested, can "lead to fire sales that create a vicious cycle of mark-to-market losses, margin calls, forced deleveraging, and further losses."