Fed official backs tougher stress tests for 'too big to fail' banks

CAPE TOWN • A top US Federal Reserve official said yesterday that he backs tougher stress tests for "too big to fail" banks, including higher capital requirements that would make them "even more binding".

The United States adopted both stress tests and capital surcharges for banks in the wake of the 2007-2009 financial crisis, in which US investment bank Lehman Brothers collapsed and set off a deep global recession.

Boston Fed president Eric Rosengren, among the US central bank's more influential regulators, said those changes have significantly reduced the likelihood that so-called systemically important financial firms will fail.

The Federal Reserve Board has not yet decided whether systemic banks will be required to include capital surcharges in the overall capital requirements under the regular stress tests.

The regular tests determine whether firms would survive deep hypothetical shocks to markets and the economy.

"I would be in favour of such changes," Mr Rosengren, who is not on the Fed Board, said of including the surcharges or raising minimum requirements "by other means".

Systemically important firms such as JPMorgan Chase and Goldman Sachs "should be required to increase post-stress minimums through one means or another", he told the Financial Stability Institute in Cape Town, South Africa, according to prepared remarks.

The surcharges are estimated to be between 1 per cent and 4.5 per cent.

Mr Rosengren, who did not comment on US monetary policy, also applauded Standard & Poor's and other rating agencies for seeing the benefits of a new Fed rule, known as total loss-absorbing capacity, that aims to ensure that enough private, and not public, funds would be used if a too-big bank failed.

"It is encouraging to see that rating agencies are viewing the actions taken as significantly reducing the... problem," he said.

REUTERS

A version of this article appeared in the print edition of The Straits Times on February 05, 2016, with the headline 'Fed official backs tougher stress tests for 'too big to fail' banks'. Print Edition | Subscribe