Fed’s Tarullo warns that banking reforms are losing steam

A top federal regulator overseeing the banking sector said Wednesday that reforms begun after the financial crisis are still far from complete and raised concerns that the energy behind the effort may be fading.

The warning from Daniel Tarullo, a Federal Reserve governor, comes as banks are putting up stiff resistance to new oversight and financial regulations — including at a private meeting Wednesday between Tarullo and the heads of Goldman Sachs, JPMorgan Chase and other Wall Street firms, according to the Fed.

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“It is sobering to recognize that, more than four years after the failure of Bear Stearns began the acute phase of the financial crisis, so much remains to be done,” Tarullo said Wednesday at the Council on Foreign Relations in New York before he met with the chief executives.

“For some time my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed,” he added. “This remains a very real concern.”

A report released this week by the law firm Davis Polk said that regulators have missed 67 percent of deadlines for new rules imposed by 2010’s Dodd-Frank legislation, a rewrite of the rules governing the financial sector.

Among the major new regulations that has been delayed is the Volcker Rule, which would seek to prevent banks from taking excessive risks by curtailing their ability to speculate with their own money — rather than on behalf of clients.

The Fed and other regulators have published the details of the new rule, which was set to take effect in July, but they have faced intense objections from the financial industry. The Fed said last month that banks will have until July 2014 to comply fully with the rule as additional details are worked out.

The meeting Wednesday at the Federal Reserve Bank of New York brought together Tarullo, a former law school professor appointed by President Obama, and Wall Street chiefs, including JPMorgan boss Jamie Dimon and Goldman head Lloyd Blankfein. Other bank chiefs in attendance included Richard K. Davis of U.S. Bancorp, James P. Gorman of Morgan Stanley, Joseph L. “Jay” Hooley of State Street and Brian T. Moynihan of Bank of America.

The meeting focused primarily on the Fed’s stress tests — periodic evaluations of how banks would perform under bad economic conditions — but also on the financial industry’s broader concerns about regulators’ plans, the Fed said.

Banks are complaining that the regular set of stress tests overseen by Tarullo is being done in a secretive and ambiguous manner that can create new risks.

The criticism came after the Fed said this year that stress tests revealed that four of the 19 largest banks did not hold enough financial reserves to withstand a severe economic decline. The Fed required them to come up with plans to improve their buffers.

“It is simply unfair to ask a bank to pass a test — and manage towards the standards of that test — if the parameters are largely unknown or otherwise opaque,” banks said in an April 27 letter to the Fed.

In remarks last month, Tarullo said that sharing too much information about the nature of the Fed stress tests would allow banks to game the results.

“There is some tension between the desirability of providing more information to firms and the importance of not turning capital planning into a mechanical compliance exercise, in which firms simply run the Federal Reserve model, instead of developing and enhancing their own risk-management and capital planning capacities,” Tarullo said at a conference in Chicago.

Bank executives have been especially pointed in their criticism of a proposal that seeks to limit the risk when two very large financial firms do business with each other. Their exposure to each other would be limited to 10 percent of their credit risk.

The proposed rules “would mandate methodologies that markedly depart from well-established and sensible risk management practices, drastically exaggerating actual exposures, and, if adopted as proposed, would require massive unwinding of existing transactions and reduce liquidity in key markets,” the banks wrote in the letter.

Tarullo and other Fed officials have met routinely with banking executives during the rulemaking process. But meetings between chief executives and Tarullo have been less common. Tarullo last met with bank officials in March.

On Wednesday, Tarullo did not respond directly to the bank CEOs’ criticism and said the Fed’s judgments would be based on their views as well as all other comments the central bank receives.

Also discussed Wednesday were issues involving the Volcker Rule, credit ratings, risk retention and international regulation.

 
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