Daniel Tarullo cited the vulnerability of some debt markets in proposing measures to buffer against losses.
A prominent financial regulator on Friday advocated for new measures aimed at strengthening large Wall Street firms, a move that could add momentum to the growing number of calls to reduce the risks posed by big banks.
In a speech, Daniel Tarullo, a Federal Reserve governor, said some of the debt markets that Wall Street institutions borrow in remain vulnerable, even after the overhauls instituted after the financial crisis of 2008.
To make the system safer, Tarullo floated an idea that could affect banks that make heavy use of these wholesale markets. His idea is to require such banks to hold extra capital, a part of a bank’s balance sheet that can serve as a buffer against losses.
“We would do the American public a fundamental disservice were we to declare victory without tackling the structural weaknesses of short-term wholesale funding markets, both in general and as they affect the ‘too big to fail’ problem,” Tarullo said in a speech at the Peterson Institute for International Economics.
Tarullo’s speech, which called for other changes to toughen regulation, follows a bill introduced last week that took aim at large banks. The legislation, from Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., would subject the biggest banks to much higher capital requirements than smaller banks. If the bill is passed, many large banks would probably choose to divest themselves of assets to shrink to a size where they would not be required to hold higher amounts of capital.
The bill has already generated fierce objections from the financial industry. Its critics said the capital increases would force banks to cut back on their lending, and they argued that large banks provide unique benefits to the economy.
Political analysts have said that the Brown-Vitter bill has little chance of passing, but the measure has reignited a conversation about what to do about banks whose failure could weaken the broader financial system.
Tarullo’s speech indicates that senior regulators are also dissatisfied with the status quo. They are devising ways to improve on the two main overhauls that came after the crisis, which are the Dodd-Frank Act, passed by Congress in 2010, and the internationally agreed bank regulations known as Basel III.
Regulators like the Federal Reserve don’t have to wait for Congress to pass legislation to introduce new measures. The Dodd-Frank Act gave regulators substantial freedom to come up with measures to strengthen the system on their own.