Fed lays out plans for new bank funding rules

The Federal Reserve plans to curtail banks' reliance on short-term debt funding, and its capital surcharges for the biggest banks will be tougher than globally agreed rules, a top Fed official says.

In his clearest statement of the Fed's plans so far, Governor Dan Tarullo said the central bank is working on three different sets of measures after unreliable funding became a major cause of the 2007-09 financial crisis.

Federal Reserve System Governor Daniel Tarullo
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Federal Reserve System Governor Daniel Tarullo

"We believe that more needs to be done to guard against short-term wholesale funding risks ... volumes are still large relative to the size of the financial system," Tarullo said in notes prepared for testimony at a hearing in the Senate Banking Committee on Tuesday with other regulators.

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Wholesale funding markets, in which banks lend each other money for short periods, sometimes lasting only days, were a key factor in the demise of investment bank Lehman Brothers, when panic quickly spread at the height of the 2007-09 crisis.

The Fed will require the largest banks, which are identified as so-called systemically important financial institutions, to hold more equity capital proportionally to the amount they rely on short-term funding, Tarullo said.

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Global rules will require these large banks to have a higher proportion of equity capital for every dollar they borrow, and Tarullo said the Fed's rules for these banks would be tougher than the international rules.

The Fed is also planning to set floors for collateral haircuts involving repurchase agreements, securities lending and other transactions, to prevent excessive leverage from building up, Tarullo said.

Finally, the Fed was working on proposed changes to the so-called net-stable funding ratio, Tarullo said, a globally agreed measure that requires banks to match their assets with longer-term liabilities such as client deposits and long-term debt. The changes would also help rein in short-term funding markets.

By Reuters