WHEN: TODAY, FRIDAY, JANUARY 14TH
WHERE: CNBC'S BUSINESS DAY PROGRAMMING
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Governor Daniel Tarullo today on CNBC.
All references must be sourced to CNBC.
STEVE LIESMAN: Okay. Governor Tarullo, thank you for joining us today.
GOVERNOR TARULLO: Good to be with you, Steve.
STEVE LIESMAN: Fantastic. Let's begin on an issue I think is high of the minds of markets right now. The-- consideration by the Federal Reserve of increasing dividends by the bank-- for the banks that it regulates. Where are you in that process? Have you guys decided-- who-- who's gonna raise their dividends?
GOVERNOR TARULLO: Well, Steve, as I think you know-- the requests for dividend increases by the largest banks were submitted just about a week ago today. So our staff is in the process of analyzing them right now. I think, though, it's helpful to begin with some context here, as to how and why this dividend issue has come to our attention, and why it's something that the markets are interested in.
In the run-up to the crisis, a lot of financial institutions continued to pay dividends, even as their capital position was eroding. And this is something which obviously exacerbated the problems of many institutions once the crisis hit. So during the crisis itself, and in its immediate aftermath, as a matter of husbanding capital resources, and a sound supervisory policy, dividends at the largest institutions were maintained at historically quite low levels.
Now, during that same period, the largest institutions were repaying tarp, for the most part. Raising a good bit of capital. And in general, restoring themselves to a much sounder capital position. We pushed for significant common equity raises. And in no small part because of that, the financial firms, but also the sector more generally stabilized and improved.
So once the expectations for future capital requirements were out, we thought that it was appropriate to begin the next step of the normalization of practice, and in the financial sector generally. And so we indicated that-- as part of their capital planning process, firms could request that they increase what have been for many of them nominal or quite low dividends over the last couple of years.
Now, having said that, we are going to proceed in a conservative fashion. This is not a fully normalized financial environment. There are still risks out there. But we have received from each of the largest S Cap, or the largest 19 firms, a capital plan. And some of those firms will have requested dividends or-- stock redemptions, or both, in the early part of this year.
STEVE LIESMAN: Can you say how many have requested higher dividends?
GOVERNOR TARULLO: No, I can't say that at-- at this time.
STEVE LIESMAN: And I guess you're not going to tell me the names of those who you know decided to allow to raise their dividends?
GOVERNOR TARULLO: If you thought so, Steve, I'm afraid I'm going to have to frustrate you on that.
STEVE LIESMAN: But can you tell me the--
STEVE LIESMAN: Can you explain to us the criteria The Federal Reserve will use to decide whether or not a bank can raise dividends?
GOVERNOR TARULLO: Yes. So first point to make here is that every one of the 19 largest institutions, even those that are not proposing dividend increases in the short-term, needs to have submitted to us a full capital plan. And this is really a reflection of the new approach to large bank supervision that was taken at the Fed. We will be looking at each of those plans to assess the present capital position of the firm and also-- the expectation of what might happen to the firm in a stressed environment.
So we have given each of the firms a macro stress scenario, an adverse scenario, which they are running-- have run through their-- models, to see what kinds of losses would be entailed. We've also asked them to run their own stress tests, and report the results to us. We've also asked them to report on things like mortgage put backs and compliance with Dodd-Frank, the sorts of things that aren't captured in a conventional stress test, but that are important for thinking about their capital position.
Our staff will be analyzing the reports and the analysis, which the banks themselves have done. And then in the case of institutions which have requested a first quarter-- dividend increase-- we will be making an evaluation of whether even in the kind of stressed environment that we gave them to project, or that they themselves have generated, that they would be able to keep their common equity ratio above five percent at the end of that stress period.
STEVE LIESMAN: When will you give the results out? When will they be made public?
GOVERNOR TARULLO: For the institutions that have requested an increase in the first quarter, we will let them know by about the 21st of March. For all of the institutions, because some have not requested for the first quarter but would like to develop the basis for doing it later in the year. We'll be getting back to them by the end of April.
And Steve, I think it's important here to recognize what this process is, and what it isn't. What it is, is a-- is a part of-- as I said earlier, a new approach to bank supervision in which the internal capital planning of the bank is an ongoing part of the our supervisory exercise.
STEVE LIESMAN: Do they have to submit capital plans on an ongoing basis now?
GOVERNOR TARULLO: On a regular basis, yeah. Probably annually.
STEVE LIESMAN: Annually? But that's not been formally decided yet?
GOVERNOR TARULLO: It's the presumption. But it obviously will depend, in part, on this experience. 'Cause we have to see how much work needs to be done.
STEVE LIESMAN: Right.
GOVERNOR TARULLO: The-- what it isn't is a repeat of the stress test from early 2009.
STEVE LIESMAN: Okay. Why not?
GOVERNOR TARULLO: So the stress test in early 2009 were first substantially more involved than this exercise. We standardized as much as we could across the 19 institutions. It was also a highly iterative process in which each portfolio of each bank was examined by Fed and OCC and FDIC examiners. Compared to our presumptive loss rates, adjusted based on the characteristics of the portfolio and then put back into the loss estimates. The-- as I think you recall, that took a couple of hundred people more or less full-time for three months.
That was an exercise that was done in the middle of a crisis, in extraordinary circumstances, with a compelling need to tell markets in the world what the condition of our firms was. Here, we're obviously in a different environment, in which we're not trying to standardize everything to that-- degree. We are looking for sound and rigorous-- internal stress testing, and internal capital analysis which are tailored to the characteristics of those firms.
So I-- I know it's probably fruitless for me to say this, but I don't think that it's going to be appropriate for markets commentators and others to regard this as the-- as the kind of score card that the S Cap exercise last year was.
STEVE LIESMAN: Right. Right. I have so many questions on this dividend thing. I hate to spend all this time on it. But it seems to really need it. How do you keep from creating haves have have-nots in the banking industry, where there are those who are allowed to raise their dividend, and they attract more capital, which over time allows them to raise their dividend. Those who are not allowed to raise their dividend, they end up being left behind.
GOVERNOR TARULLO: Well, I mean, to some degree, in any competitive system one is going to expect more interest in investing in firms which over some extended period of time are doing well. And-- and so unless we are thinking about convoy system for our banking industry, we can't and shouldn't want to stop differentiation.
Indeed, one of the big, I think, agreed principals of financial reform has been that firms should be susceptible to and exposed to market judgments, even harsh market judgments where appropriate. I would say here, though, people shouldn't be too hasty to make judgments based upon-- certainly based upon whether a firm grants a dividend in the first quarter. And-- and here's why.
First off, as-- as I indicated, not all the firms have requested dividend increases for Q one. Some of them, because they have a different rhythm, which they want to follow. Next, others which have requested the dividends, and I can say this now because we haven't actually done the analysis, so this is hypothetical. But others that have requested dividends may have requested a dividend which we judge to be too high, relative to their capital position, even though some dividend increase would have been appropriate.
Third, there may be instances in which we are uncomfortable with some of the analysis that the firms have done. For example, their projection of future earnings, or their assessment of a particular-- portfolio's loss exposures. But which, once those differences are resolved, and we've come to an understanding with them, may yield a positive answer. But that could go into the next quarter. And finally, there may be instances in which if all the analysis had been done, the firm would have seemed appropriately to be increasing its dividend.
But where we're sufficiently uncomfortable with the whole nature of their capital planning process, that we might want to-- delay until we get more comfortable. So my-- my point is, there are a lot of different reasons why a dividend may not be increased this quarter, which may have very little to do with the ultimate position of the bank.
STEVE LIESMAN: If they don't get approval this time around, do they have--
STEVE LIESMAN: How do you-- how do you make sure that the next time around the banks don't get into a situation where it's difficult for them to lower their dividend, and you don't have this issue where they're afraid to do what-- is the right thing to do? I'm actually going to ask that question again, because it's an important one, I want to have the right transition. How do you make sure you don't get into a situation again where banks need to lower their dividend, but they're reluctant to do so?
GOVERNOR TARULLO: Well, Steve, that's actually part of the Basel III Capital Reforms. There's-- as you probably recall, when-- the Basel Committee released the Basel III text, last fall, there is now both a minimum capital requirement and a so-called fixes buffer.
The fixed buffer is a two-and-a-half percent capital requirement on top of the minimum four-and-a-half percent requirement. When the two-and-a-half percent buffer is breached, there's not a requirement for immediate capital restoration. But as it's breeched further and further there will be progressively stricter controls on banks doing things like capital redemptions and dividends. So we, in cooperation with our international colleagues, have built into the new capital system a way to stop the kind of capital erosion through dividends or stock purchases that we saw in the run-up to the crisis.
STEVE LIESMAN: So it gets to be a sort of automatic, formulaic thing?
GOVERNOR TARULLO: Correct.
STEVE LIESMAN: Is that fair to say?
GOVERNOR TARULLO: And it limits-- the need for a bank supervisor to make what might be thought of as an extraordinary judgment, because now the supervisor points to the rules which have been in place, and says, "This is what's called for."
STEVE LIESMAN: So bringing it back to the current discussion, or the consideration the Fed has for the 19 banks and those of which are requesting dividend increases, you feel comfortable now approving dividend increases, because the formula is in place, through Basel III, for them to go away, or otherwise be reduced, in the event of another crisis?
GOVERNOR TARULLO: Well, I think to a degree, that, and for the firms where we do grant dividend-- grant permission to increase dividends, I think our judgment there is based fundamentally on the capital position and the capital planning capabilities of the institution. But yes, looking out into the future, in a period in which stress may be rising again, I personally feel more comfortable that we have in place a set of rules which will determine limits on capital distributions when stress begins to arise.
STEVE LIESMAN: You said something interesting before when it came to the question about, you know, will-- will we have-- create haves and have-nots. Is it fair to say that during the crisis there was-- an attempt by the authorities, by the officials in this country, to say, "You know what? All these 19 are-- the same, in the sense that they'll all survive." Have we moved away from that now? Where the idea is that now some will survive, some won't?
GOVERNOR TARULLO: Well, I think—
STEVE LIESMAN: Or, some can survive and some—
GOVERNOR TARULLO: I think, too, so-- so let's go back to the 2008-- period. With respect to financial markets generally, the problem-- the fundamental problem was one in which everyone was having trouble valuing the assets held by any financial actor. People did not know where the bottom was. And it was in those circumstances that the-- extraordinary steps of the Fall of 2008 were taken.
The centerpiece, I think, in some respects, of the Dodd-Frank Act, and indeed, I think a central principal of even the number of legislators and policy commentators who didn't support, ultimately, Dodd-Frank, is that there ought to be a third alternative between a disorderly bankruptcy and a bail-out, for a large financial firm. The resolution mechanism created by Dodd-Frank for large financial institutions which are not depository institutions, was a direct response to that perceived need.
STEVE LIESMAN: When it comes to the whole Basel III effort, how completed would you say it is? Is it half done? Everything-- 75 percent? Where would you say we are?
GOVERNOR TARULLO: Well, so here we probably need to distinguish between a set of capital rules on the one hand, and a process-- an ongoing process for coordinating supervision and financial issues on the other. I-- I think narrowly construed, Basel III is the new set of capital rules, which have been agreed upon in the wake of the crisis.
And those consist primarily of a set of changes to the market risk or trading book rules, which were badly anachronistic in the run-up to the crisis. Two, a change in the quality or definition of capital, to put a much greater emphasis on common equity, which, after all, was what both markets and supervisors looked to in the middle of the crisis as the best indicator of a firm's health.
And three, increases in the required ratios. So those three components have now been completed. The texts have been completed by the Basel Committee. And they're now ready for implementation by national authorities, including the United States. That's Basel III, again, narrowly construed, following on Basel II, and Basel I.
But the process of looking at-- what needs to be done in order to assure global financial stability is one which will necessarily be an ongoing process-- monitoring, taking initiatives where necessary. I hope where nec-- where appropriate, ending things that have been done previously, which no longer seem particularly useful. But-- but there won't and shouldn't be an end to that process any more than there should be an end to supervisory oversight, domestically.
STEVE LIESMAN: The capital rules themselves are largely done, in terms of-- there was something that was agreed to last-- at the end of last-- last month, which seems to be a little controversial. And I want you to comment on this. When a host country finds that it's in a bubble, it basically can make a decision that has an impact on the reserve requirements of banks that it doesn't supervise.
GOVERNOR TARULLO: The capital requirements.
STEVE LIESMAN: The capital requirements. Sorry. Capital requirements. If the Federal Reserve, is the United States potentially giving up too much sovereignty over its own banks through that rule that was agreed to in Basel?
GOVERNOR TARULLO: So what-- what you're referring to, Steve, is the counter-cyclical buffer, which is a discretionary element of Basel III that is to be imposed at the discretion of a country which finds that credit is expanding at a dangerous pace. And which in a counter-cyclical, rather than pro-cyclical fashion, tries to damp the growth of that credit.
There are two ways to go forward with a counter-cyclical capital requirement. One, you could try to do it-- I guess three ways. One, you could try to do it globally. Which doesn't make a whole lot of sense, because conditions vary so much from country to country. A second is you could do it-- based on the nationality of firms. But that doesn't make a whole lot of sense in an era in which big firms are genuinely international.
Or third, you can try to do it based upon the credit conditions and macro economic conditions within a particular country. If you take that third approach, which seems way the more promising of the three, then you have to confront the fact that there are lenders or other extenders of credit operating in that market, who may not be headquartered there.
If, for example, you said to-- Germany, that Germany could only-- increase capital requirements for German banks, then you've just opened up the ability of every other bank in Europe to lend into Germany at lower capital requirements, defeating the very purpose of the counter-cyclical buffer. So understood, I think, as a part of the counter-cyclical concept itself, it's really necessary to make sure that all the lending in a country is gonna be subject to the same buffer. Now, note that margin requirements, for example, in a country apply to everybody, no matter where they're headquartered.
STEVE LIESMAN: Fair enough. One of the things Basel has yet to do is to figure out how to designate what is systemically important financial institution is. We're waiting to hear that. When will that be done, and how will you do it?
GOVERNOR TARULLO: So the-- the meetings that took place in Basel-- over the weekend, and the early part of this week-- were, to a considerable extent, focused on that set of issues, around systemically important-- institutions. There's a process underway now to try to identify the globally significant financial institutions.
One hesitates to give firm deadline for such a process, but I would expect that sometime towards the middle of this year that process will probably come to the point at which there is a more concrete proposal. They-- the-- those globally active-- very much internationalized-- systemically important institutions which have operations in many countries, are, of course, only one group of institutions that could help to create a systemic problem, were they to fail. So we're gonna need to move on to thinking about a broader set of institutions. But I would expect that will be next year, rather than this.
STEVE LIESMAN: So this year you hope to have the-- the-- the criteria together? But not designate?
GOVERNOR TARULLO: No, I-- I think that there will be-- I-- I think that the present hope is that the designation itself can be achieved.
STEVE LIESMAN: By the summer, or by--
GOVERNOR TARULLO: Middle of the year.
STEVE LIESMAN: Middle of the year, you'll-- you'll have the criteria and the designation.
GOVERNOR TARULLO: And then have to, of course, make a decision of what kind of additional loss absorbency is appropriate.
STEVE LIESMAN: And will there be additional capital charges on these bigger banks?
GOVERNOR TARULLO: Well, the-- the commitment that was made by the governors and heads of supervision at the bank for international settlements last September, was that systemically important institutions ought to have-- this is a quote, "additional loss absorbency capacity." That, of course, parallels our Dodd-Frank Act requirement that systemically important institutions have additional capital requirements. And indeed-- we were pleased to see the international community adopt, essentially, the same principal as is incorporated in Dodd-Frank.
Now, what that additional requirement will be remains to be determined, both internationally and domestically. There are manifold proposals. One-- a variety of straight surcharges. Of course, what you base the surcharge on creates a lot of different proposals.
STEVE LIESMAN: The risk of capital, right, those are the issues that are imp—
GOVERNOR TARULLO: Well, what's the metric that one would use? Do you just build it on top of conventional risk-weighted assets? Do you try to use some other measure, and the like.
STEVE LIESMAN: Bank investors in the United States, or around the world and U.S. banks want to know this. At the end of the day, when this process is over, both meeting the Dodd-Frank requirements, and with what's going to happen in Basel. Given current levels, current capital levels that are required by law, will they be higher for these large institutions?
GOVERNOR TARULLO: Higher than?
STEVE LIESMAN: They are now.
GOVERNOR TARULLO: Hi-- well, surely higher than they are now. The Basel III requirements themselves—
STEVE LIESMAN: I'm sorry. Above and beyond the Basel III ones that have already been—
GOVERNOR TARULLO: Well, I--
STEVE LIESMAN: I'm going to ask that question again, so we have it clean.
GOVERNOR TARULLO: Okay.
STEVE LIESMAN: Will the designation of certain institutions as systemically important, I mean, higher capital charges, above and beyond which they already have to adhere to under the new Basel III requirements that we already know.
GOVERNOR TARULLO: The decision as to what kind of additional capital or loss absorbency requirements will eventually be required has yet to be made. So it is possible that it could be a sur-charge. In which case, Tier I or common equity might each required to be higher. It is possible that there could be an additional kind of capital, loss-absorbing capital-- that would be required. There are a number of proposals, and variants on proposals, on the table now. And that's really the work that remains to be done-- that is the 2011 agenda, I would say.STEVE LIESMAN: So we did the whole designating things-- let me just do one-- or two on Dodd-Frank here. There's a new majority in the House right now. Are you concerned that there will be changes to Dodd-Frank, given that the Federal Reserve, right now, is fulfilling-- in the process of fulfilling its obligations and the studies that need to be done on Dodd-Frank?
GOVERNOR TARULLO: Steve, we, as any Federal agency charged with implementation of a law, need to implement and enforce the law as it exists on the books. It's always the prerogative of Congress to make changes. And if changes are proposed, small, mid-sized, or larger, we'll of course comment on those. But right now we are just-- going forward with the considerable task of implementing Dodd-Frank.
STEVE LIESMAN: I understand that answer, but I have to push back a little bit, in the following way. As a bank supervisor, who is overseeing banks that are reluctant to lend, at best, would new changes to Dodd-Frank engender more uncertainty that could potentially reduce that lending even more, or hold back the lending?
GOVERNOR TARULLO: Steve, I think first off, there-- you have to decompose lending markets. Because there are some markets in which we're seeing-- some revival of lending. There are others which are-- considerably less so. Secondly, I believe that far and away the most important factor right now limiting the revival of lending in some markets is aggregate demand, is the perception of how much demand will be out there.
Other factors, regulatory and others, I'm sure play a role. But I genuinely believe they're subordinate to the basic question of are there growing markets out there for the goods and services that people want to produce.
STEVE LIESMAN: Would you say at this moment the U.S. banking system is healthy?
GOVERNOR TARULLO: I would say that-- the U.S. banking system is stable. I would say that conditions have improved, substantially, over the last couple of years. I would also say, though, we're in a period of transformation. Transformation of regulatory structures. Transformation in many cases of business models. And that-- that process is likely to play out over the next couple of years.
STEVE LIESMAN: Have you been surprised that bank lending hasn't come back more strongly than it has?
GOVERNOR TARULLO: No, because of the facts I mentioned a moment ago. The-- the heretofore tepid pace of recovery for the economy as a whole, questions that many businesses have had as to the sustainability of demand. And the consequent reluctance of those businesses to invest in new capacity, or to higher new workers.
STEVE LIESMAN: Speaking of the economy and the recovery, what is your outlook for growth this year, and for the unemployment rate?
GOVERNOR TARULLO: Well, the economy has decidedly improved-- over the course of the last six months. I think-- from where we stood in the mid to late summer of last year until now, we've seen-- substantial improvements, particularly in consumer spending-- but also in durables purchases and in inves-- and some signs of increased investment.
That, I think, has reinforced the sense that we're going to have slightly above-trend growth, going forward. And that it's a firmer embedded growth than may have been apparent six months ago. Second, though, there are still a number of headwinds and risks in the economy. You've already mentioned employment. I think until we get to the point where jobs are being created at a consistent and continuing pace, that we'll bring down unemployment, there is going to be-- an inherent lack of robustness in the economy.
Second, the housing market continues to be a laggard. And one in which I don't foresee a turnaround of any strength, certainly in the near to medium-term. And finally, we have some risks out there-- such as the Euro-periphery problems, which could have an effect-- as all external risks can. In sum, I would say that what we're seeing now is pretty much what one would have expected in terms of a recovery in the wake of a financial crisis.
We're not recovering at a pace anywhere near the pace at which the recovery-- the economy deteriorated in the crisis itself. Instead, you know, if you think about it as a curve, the-- the angle of incidence is not the same as the angle of refraction. The angle of incidence was quite steep. And the angle of refraction is a-- is a much more gradual path outwards.
STEVE LIESMAN: But you are expecting some above-trend growth this year? And will that continue into next year, as well you think?
GOVERNOR TARULLO: Well, the one is forced by FOMC-- practice, to make projections. I-- I think the-- the value of any projection probably deteriorates the further out that projection has been made. But I would say that-- the baseline expectation would be for modestly to somewhat above-trend growth this year and next. It’s important though, again, to recognize that modest to moderately above-trend growth, in the aftermath of what we experienced is not itself getting us back to where we would have been before the crisis.
STEVE LIESMAN: Well, that's my-- my next question is do you think the growth rates will be high enough to bring down the unemployment rate in a meaningful way?
GOVERNOR TARULLO: That-- that is probably the big question for the first part of this year. I guess the good news in some sense here is that-- as opposed to a year ago-- when risks seemed to be waited to the downside, I think risks are more balanced now. That is, there-- there is a story that can be told-- a plausible story that can be told of faster growth this year, and next, even as there are stories that can plausibly be told of slower growth, or more of a drag, or-- or more tepid pace of growth.
STEVE LIESMAN: The same time we see commodity prices surging, and a lot of countries around the world seem to need to take actions, a lot of central banks, to take actions to fight what they think is an incipient inflation problem. Do you see signs of inflation in the United States?
GOVERNOR TARULLO: Well, we've certainly seen some increase in headline-- inflationary numbers, which, of course, disproportionately reflect energy and-- and food that is other commodity prices-- as well. In terms of core inflation, though, both at present, and looking forward-- one doesn't see at this juncture, any signs of significant upward pressure on inflation. If you look at expectations in the markets, if you look at inflation compensation. If you look at survey data. There i-- expectations do seem anchored.
And indeed even with respect to commodities-- one doesn't see an indication that markets are beginning to price in-- longer term effects on inflation more generally. I-- I would say, though, in countries which are growing rapidly, I think there one is more likely to see-- some-- some inflationary effects. And that's probably why some of the central banks you've referred to are paying more attention to it.
STEVE LIESMAN: Have you been surprised that in the wake of QE 2 or whatever you want to call it, that interest rates have risen?
GOVERNOR TARULLO: Well, no. So the increase in interest rates-- in recent months has, to a considerable extented reflected increasing economic prospects. That is, I would say, in-- in some important respects, the increase in some of the real rates has been a salutary consequence of the additional large-scale asset purchases, which we announced in November, but, which, of course, we foreshadowed by Chairman Bernanke-- in August.
We have seen and did see a decline in rates-- as the expectation that there would be the additional large-scale purchases. We certainly saw some portfolio rebalancing. We saw the effect upon-- stock markets, asset prices, more generally. And very importantly, I think we saw fears about possible deflation recede-- in the wake of the Chairman's speech in August.
Now, subsequent to our action in November, the-- markets were generally more optimistic about medium-term prospects. And with the fiscal package, which the Congress enacted during the lame duck, I think that optimism was reinforced. So, of course, rates reflect-- expectations of growth, just as they-- have reflected expectations of what monetary policy was.
STEVE LIESMAN: Has the economy improved enough that the Fed should consider whether or not it should fulfill the promises in the LSAP that were made in December?
GOVERNOR TARULLO: Well what we said in November was that-- we would review the-- program that we announced. And you can imagine both upside and downside reasons to review it. I-- I would say that I am among those think that there should probably be a pretty high threshold for reviewing or changing, in either direction. And certainly, to date, I haven't seen anything which would warrant a reconsideration.
STEVE LIESMAN: So you're that guy in the minutes who-- had the
STEVE LIESMAN: A lot of concern right now in the municipal bond market. As a banking regulator, supervisor, do you have concern that what's happening in the municipal bond market has the potential to weaken the banking system?
GOVERNOR TARULLO: Well, there are-- there are lots of risks and exposures that banks face. Some-- municipal bonds are guarantees for short-term-- municipal liabilities are among them. That's something which our examiners and analysts-- take into account, have taken into account. And it's something which, among other exposures, will be looked at in the capital plans and projections-- that large institutions have submitted. So it's a-- there are risks there, as there are risks in many other areas. It's-- it's not something that-- I would have identified as the risk, or something topping all other risks. It's just something that needs to be packaged in with all the other activities of the institutions.
STEVE LIESMAN: I know this next area is not specifically your area. But it's something the Fed has done that's been very controversial these interchange in swipe fees that are out there. Two Republican Congressmen said that-- you want to be very careful that you don't really slow down consumer lending. And the ABA says they oppose price fixing. This idea of 12 sets-- how do you respond to the criticism the Fed has gotten for these swipe fees?
GOVERNOR TARULLO: Well, so I'd say a couple of things about it. First-- this is the rule that was approved by the board was a proposed rule. Not a final rule. The reason why we have proposed rules, not just at the Fed, but in the administrative law system of the United States, is precisely to allow for comment.
And the comments made by a number of members of the board, myself included, at the-- Fed meeting, the open board meeting we had on this topic-- suggested that the complexity of this issue, and its novelty for the Fed-- implied that we should be particularly open to comments from all sides as they come in, in this period between the-- provisional-- the preliminary and final rule.
The second thing I would say, though, Steve, is we do have to follow the law. And-- certainly there-- there-- I-- I've seen some criticisms or letters which have said things like, "Well, why doesn't the Fed-- why isn't the Fed taking fixes costs into account?" Well, there's a simple answer to that one. The statue says you can't.
So as in all areas, the agency charged with implementing a rule needs to be faithful to the language of the statute and to exercise its discretion as is appropriate within the confines of this statute, taking into account costs and benefits-- as-- as appropriate.
But you do have to abide by the language of the statute. Now, that-- I'm obviously not foreshadowing what the final rule will or will not be, but I-- I'm just trying to orient people to the task we have. This is not writing on a blank slate, in which people say, "So what's the best-- what do people think the best policy here is?" The Congress has already decided in general terms, what their policy is.
STEVE LIESMAN: You have been-- you were among the first, if not the fist to call for national mortgage foreclosure standards. Where are you at in that process, and what is that process gonna be?
GOVERNOR TARULLO: Not just foreclosure standards, but servicing standards.
STEVE LIESMAN: Servicing standards.
GOVERNOR TARULLO: Look, I-- I think if we needed any reminder of the degree to which servicing had been overwhelmed by the foreclosures, but perhaps even the loan mods, the number of mortgages in the United States, the robo-signing imbroglio has-- given it to us. As I looked around, got the reports from our staff as to-- preliminary reports, as to what they thought was going on, it seemed to me that obviously we should and will have appropriate-- take appropriate enforcement action with respect to those particular practices.
But in light of the problems that-- so many homeowners have had seeking loan modifications, the classic facts to nowhere-- sort of problem. I came to the conclusion that we really need a set of national mortgage servicing standards which would apply to any sizable servicer-- whether that servicer was an insured depository institution, an affiliate of such an institution, in another part of the bank holding company, or completely outside a bank holding company.
And what I proposed at the Senate banking committee hearing last fall was that-- we think about such an idea. I-- I was pleased that-- my fellow panelists and a number of-- Senators, seemed to think that was a good idea. So what we've been doing is working with the other banking agencies-- to try to develop a set of standards-- some-- many of which we can implement just as regulators.
The new consumer-- financial services consumer protection bureau, could implement them for non-- bank-related entities. And there may be some areas in which legislation will be-- will be needed. So I-- I think what we intend to do is report back to the Senate banking committee on what our thoughts are and how we think-- we all should proceed. And I-- I think we'll be doing that quite soon.
STEVE LIESMAN: You've said in December there was the four largest banks, largest servicers, had-- I'm sorry, banks, I believe you said. You said-- you said in December, the four largest banks had put aside $9.7 billion in reserves for put-backs. Is that number growing? Is it about right?
GOVERNOR TARULLO: So the-- the-- the put-back issue is one that-- is one among many that we've gotten a lot more insight on in the intervening weeks. And the capital plans that were submitted last week-- will directly address, because obviously that's significant for capital. I obviously don't have complete information on that precisely because it was just submitted in our-- our staff is analyzing it.
But I-- I think market analysts have reduced somewhat the numbers that they think reflect-- the ultimate exposure of banks in-- in significant part because of the nature of the settlements between the GSEs and a couple of large institutions. Which seem to set a benchmark that help people to do-- an analysis.
Now, these are-- these can be-- still be significant in dollar terms. And perhaps very significant. But if I-- if I had to sum up, Steve, I would say that the documentation set of problems-- has continued to seem as serious as we anticipated, or-- or suggested in that hearing last fall. I-- I would say that on put-backs it is obviously significant.
Some institutions may be quite significant. But market perceptions at least seem to be somewhat-- less negative, and we'll see if that's borne out in our analysis over the next several weeks.
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