Tarullo Says Fed Should Oppose Mergers That Increase Risk

By Craig Torres

Federal Reserve Governor Daniel Tarullo said regulators should use capital surcharges to discourage mergers by large banks that would increase risk without yielding significant public benefits. Tarullo signaled that the Fed aims to use tougher capital standards correlated to the size of a firm to curb risks posed by “systemically important financial institutions,” or “SIFIs.” “There is little evidence that the size, complexity, and reach of some of today’s SIFIs are necessary in order to realize achievable economies of scale,” Tarullo, the Fed governor responsible for supervision and regulation, said in a speech at the Peterson Institute for International Economics today in Washington. “The regulatory structure for SIFIs should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant.”  The Fed is developing a metric for banks with more than $50 billion in assets that gradually increases capital requirements according to measures of systemic importance including size, Tarullo said. “The ideal approach would be a continuous function, by which the percentage rate of the additional requirement would vary precisely with the measure of a firm’s systemic importance,” Tarullo said. “An alternative would be a tiered structure, by which firms are divided into several groups on the basis of the systemic metric.” Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington, called the speech “emphatic and unforgiving.” “Higher amounts of mandated equity result in a lower return on equity” as banks carry less leverage, she said. “Regulators argue that this will produce a more stable return. But that remains to be seen.”