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Fed's Tarullo: Reduction of capital at US banks 'would be ill-advised'

Reduction of capital requirements at U.S. banks "would be ill-advised," Federal Reserve Governor Daniel Tarullo said in prepared remarks on Tuesday.

"We should err somewhat on the side of higher capital requirements for these firms," he said at The Woodrow Wilson School at Princeton University.

Tarullo even suggested higher capital requirements for banks, arguing that a bigger buffer would lower the risk of a financial crisis.

Increased capital requirements were placed on banks deemed too big to fail as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was created in the wake of the financial crisis.

Recent talk out of Washington of deregulation for the banks has buoyed financial stocks, as market participants believe the rules have stymied profits for the sector. But Tarullo argued that record bank profits show that Wall Street regulation didn't hurt the banking industry or the economy.

"Moreover, given the healthy increases in lending over the last several years and the record levels of commercial bank profits recorded in 2016, it would seem a substantial overreach to claim that the new regulatory system is broadly hamstringing either the banking industry or the economy," Tarullo said.

He said, however, that the Volcker rule — part of Dodd-Frank — is too complicated and includes too many banks. Tarullo also repeated his assertion that it seems "unnecessary" to make small banks comply with Dodd-Frank, given the "limited compliance capabilities" of these institutions