Federal Reserve officials strongly signaled they will toughen big-bank capital requirements even more than they have since the 2008 crisis, a move that will add to the pressure on the largest U.S. banks to consider shrinking. Fed governors Daniel Tarullo and Jerome Powell, in separate public comments on Thursday, said the Fed would require eight of the largest U.S. banks to maintain more equity to pass the central bank’s annual “stress tests.”
“Effectively, this will be a significant increase in capital,” Mr. Tarullo said on Bloomberg television….Mr. Powell said at a banking conference that the Fed’s move would make big banks “fully internalize the risk” they pose to the economy.
“I have not reached any conclusion that a particular bank needs to be broken up or anything like that,” he said. The point is to “raise capital requirements to the point at which it becomes a question that banks have to ask themselves.”
Although there have been some regulatory changes since the bank crash of 2008, big banks still have an unfair advantage in the market: their funding costs are lower because investors figure they’ll be bailed out if they ever implode in the future.
But this news today indicates a recognition of the problem. Big banks should, as Tarullo said, “fully internalize the risk” they pose to the economy. In other words, if big banks have an automatic advantage simply because taxpayers have little choice but to rescue them in case they fail, they should be required to pay higher insurance premiums against failure. That’s essentially what higher capital requirements do.
This won’t make big headlines, and it’s not sexy and it’s not Trump insulting somebody. And maybe it still doesn’t go far enough (Bernie Sanders simply wants to break the big banks altogether). But it is a step in the right direction to fiscal responsibility.