Capital Burden of U.S. Bank Exams Could Rise, Tarullo Says
By Ian Katz and Claire Boston

Large U.S. banks will probably have to endure tougher scrutiny of their capital to pass annual stress tests, Federal Reserve Governor Daniel Tarullo said.  There’s “more than a pretty good chance” that banks will face “some net increase in the post-stress minimum capital requirements,” Tarullo said in an interview Monday with David Westin and Stephanie Ruhle on Bloomberg Television. Such a step could result in banks having to hold more capital to be allowed to pay dividends to their shareholders.  The Fed hasn’t decided how it will toughen the stress tests, but it could be through incorporating capital charges in the exams or by drilling down on exposures to other financial firms and trading partners, said Tarullo, who is the central bank’s point person on regulatory matters. Tarullo’s comments Monday were his strongest yet indicating that the Fed is likely to take such action. The Fed in July assigned capital charges totaling more than $200 billion for eight of the biggest U.S. banks, including JPMorgan Chase & Co. and Citigroup Inc., to reduce the risks they could pose to the financial system. The extra capital requirements, or surcharges, range from 1 percent to 4.5 percent of banks’ risk-weighted assets.  For banks, having the surcharge included in the exams would be a “significant burden, particularly because of the interplay of the other rules coming into effect,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. She cited a regulation the Fed proposed last month on loss-absorbing capital that banks must hold.  Petrou said the added capital requirement would likely be included in the 2017 tests and not the next round whose results will be released next year.