Fed Eyes Higher Stress Test Capital Levels for Biggest Banks
By John Heltman
WASHINGTON — Two Federal Reserve governors said Thursday that the central bank will likely require the biggest banks to apply their capital surcharges in order to pass the annual stress tests — a standard that could be costly for some institutions to meet.  “It is likely, I believe, that we will incorporate the full amount of the surcharges into the post-stress capital requirements,” Fed Gov. Jerome Powell said during a question-and-answer session at a conference here. “It is also likely that it will not be a dollar-for-dollar increase in the capital requirements. It will be a substantial increase in the requirements, but there will be some offsets.” His comments came after Fed Gov. Daniel Tarullo, who chairs the board’s Supervisory Committee, said in an interview with Bloomberg TV that those “offsets” effectively mean a relaxation of some assumptions that have been built into the Fed’s Comprehensive Capital Analysis and Review. Those provisions were meant to capture some of the same unknown or unknowable risks that are more methodically considered in the surcharge rule, which applies to the eight largest U.S. banks…. Some industry observers have raised concerns that the cumulative impact of the post-crisis regulatory regime as imagined by the Fed and other bank regulators is hastening the shift of financial services away from the banking sector and toward the less-regulated “shadow banking” sector. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said her firm has recently completed work on a lengthy analysis of available research that suggests that the migration away from the banking sector may affect the Fed’s ability to transmit monetary policy objectives into the financial system. The Fed’s tools apply to banks, Petrou said, but if banks are no longer the dominant venue of financial transactions, the Fed’s monetary policy objectives become harder to realize.  “The paper demonstrates that, with regard to the macroprudential regulation and with regard to monetary policy transmission … the market is not waiting for the Federal Reserve to finish its run-through all the footnotes,” Petrou said. “There are very disturbing signs evident in the array of Federal Reserve and BIS research we cite that warrant immediate attention.”