WSJ Pro Event with Daniel Tarullo
Wall Street Journal Pro
A Conversation with Fed Governor Daniel K. Tarullo
Wednesday, July 6, 2016
Key Topics & Takeaways
- Regulatory Reform: Responding to a question about the “ultimate goal” of reform and whether it seeks to change financial institution’s sizes or business models, Tarullo said regulators do not have specific changes in mind for the firms to undertake, and that firms will make their own decisions as reforms are put in place to make the financial system safer.
- Financial CHOICE Act: Tarullo warned that simply relying on a higher leverage ratio, as proposed by Chairman Jeb Hensarling (R-Texas), would incentivize banks to take more risks since capital requirements would not change, and that the proposed 10 percent level would have to be “substantially higher” for regulators to be comfortable with it.
- Cumulative Impact of Regulations: Asked about the European Commission’s recent Call for Evidence on the interactions of post-crisis reforms and whether the U.S. should pursue a similar exercise, Tarullo said it is not realistic to attempt to look at the cumulative impact of all post-crisis rules and try to model all their interactions and adaptive behaviors.
Speakers
- Daniel Tarullo, Federal Reserve Board of Governors
Conversation with Daniel Tarullo
The Wall Street Journal’s Jon Hilsenrath and Jacob Schlesinger moderated a discussion with Governor Daniel Tarullo of the Federal Reserve Board.
Brexit
Asked about how the world economy has absorbed the shock of the U.K.’s referendum on leaving the European Union, Tarullo said the U.S. and global economy were well-positioned to absorb the shock in the short-term, but that uncertainty regarding any exit agreements can have inhibiting effects on investment decisions in the medium-term.
Monetary Policy
On monetary policy, Tarullo said it is worth focusing more on the Federal Reserve’s mandate to promote maximum employment, commenting that there is still slack in the economy and that it is “not running hot” yet. He added that he thinks it is better to wait for more evidence that inflation is moving towards the two percent target before raising rates.
Tarullo admitted that a long period of low interest rates can have effects on financial stability, but he said this alone is not enough to justify raising rates and that there are other considerations to take into account.
An audience member asked about the possibility of negative interest rates and its potential effects. Tarullo stressed that the Federal Reserve is not considering negative rates, but he noted that the Fed’s stress tests did include the possibility and found that large institutions are well-positioned to manage the challenges of such a situation.
RegulatoryPolicy
Asked about an article in the Wall Street Journal that dubbed him “the most powerful man in banking,” Tarullo downplayed his role in crafting financial regulatory reforms and stressed that regulators and Congress jointly set themselves on fundamental reforms of the U.S. financial system, and that the implemented reforms were the result of collective judgment, not just his own.
Responding to a question about the “ultimate goal” of reform and whether it seeks to change financial institution’s sizes or business models, Tarullo said firms have already been making adjustments to the size and composition of their balance sheets for both regulatory and business reasons. He said regulators do not have specific changes in mind for the firms to undertake, and that firms will make their own decisions as reforms are put in place to make the financial system safer.
Liquidity Requirements
Tarullo discussed the implementation of capital and liquidity rules, noting that there were no quantitative liquidity requirements before the financial crisis and that the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are now working to ensure that financial institutions are not caught again with long-term illiquid assets and short-term liabilities that make them susceptible to runs. While acknowledging that work remains to be done on this front, he said the banks’ resilience in the aftermath of the Brexit shows that the LCR has put them in a better position to handle stress.
Countercyclical Capital Buffer
An audience member asked about the Bank of England’s decision to reduce its countercyclical capital buffer for U.K. banks to spur the economy and generally about lifting capital requirements to promote growth. Tarullo explained that the countercyclical capital buffer allows regulators flexibility to dial up or down the capital requirements based on market conditions. He commented that the Bank of England was among the first regulators to raise the buffer, and that it is only adjusting it downwards now because of the Brexit referendum.
Physical Commodities
Asked about the Federal Reserve’s rulemaking on bank ownership of physical commodities, Tarullo stated that the Fed is seeking to address the relative risks of trading in physical commodities, and that the Fed has the ability to change capital requirements with respect to these commodities.
Financial CHOICE Act
In response to a question about risk-weighting in light of House Financial Services Committee Chairman Jeb Hensarling’s (R-Texas) Financial CHOICE Act, Tarullo stated that risk-weighting allows regulators to address different risks within a portfolio. He warned that simply relying on a higher leverage ratio would incentivize banks to take more risks since capital requirements would not change, and that the proposed 10 percent level would have to be “substantially higher” for regulators to be comfortable with it.
Cumulative Impact and Interaction of Regulations
Asked about the European Commission’s recent Call for Evidence on the interactions of post-crisis reforms and whether the U.S. should pursue a similar exercise, Tarullo answered that the Federal Reserve is already doing assessments of capital and liquidity requirements, and that it is always open to other experts doing their own analyses. However, he said it is not realistic to look at the cumulative impact of all post-crisis rules and try to model all their interactions and adaptive behaviors.
For more information on this event, please click here.
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Wall Street Journal Pro
A Conversation with Fed Governor Daniel K. Tarullo
Wednesday, July 6, 2016
Key Topics & Takeaways
- Regulatory Reform: Responding to a question about the “ultimate goal” of reform and whether it seeks to change financial institution’s sizes or business models, Tarullo said regulators do not have specific changes in mind for the firms to undertake, and that firms will make their own decisions as reforms are put in place to make the financial system safer.
- Financial CHOICE Act: Tarullo warned that simply relying on a higher leverage ratio, as proposed by Chairman Jeb Hensarling (R-Texas), would incentivize banks to take more risks since capital requirements would not change, and that the proposed 10 percent level would have to be “substantially higher” for regulators to be comfortable with it.
- Cumulative Impact of Regulations: Asked about the European Commission’s recent Call for Evidence on the interactions of post-crisis reforms and whether the U.S. should pursue a similar exercise, Tarullo said it is not realistic to attempt to look at the cumulative impact of all post-crisis rules and try to model all their interactions and adaptive behaviors.
Speakers
- Daniel Tarullo, Federal Reserve Board of Governors
Conversation with Daniel Tarullo
The Wall Street Journal’s Jon Hilsenrath and Jacob Schlesinger moderated a discussion with Governor Daniel Tarullo of the Federal Reserve Board.
Brexit
Asked about how the world economy has absorbed the shock of the U.K.’s referendum on leaving the European Union, Tarullo said the U.S. and global economy were well-positioned to absorb the shock in the short-term, but that uncertainty regarding any exit agreements can have inhibiting effects on investment decisions in the medium-term.
Monetary Policy
On monetary policy, Tarullo said it is worth focusing more on the Federal Reserve’s mandate to promote maximum employment, commenting that there is still slack in the economy and that it is “not running hot” yet. He added that he thinks it is better to wait for more evidence that inflation is moving towards the two percent target before raising rates.
Tarullo admitted that a long period of low interest rates can have effects on financial stability, but he said this alone is not enough to justify raising rates and that there are other considerations to take into account.
An audience member asked about the possibility of negative interest rates and its potential effects. Tarullo stressed that the Federal Reserve is not considering negative rates, but he noted that the Fed’s stress tests did include the possibility and found that large institutions are well-positioned to manage the challenges of such a situation.
RegulatoryPolicy
Asked about an article in the Wall Street Journal that dubbed him “the most powerful man in banking,” Tarullo downplayed his role in crafting financial regulatory reforms and stressed that regulators and Congress jointly set themselves on fundamental reforms of the U.S. financial system, and that the implemented reforms were the result of collective judgment, not just his own.
Responding to a question about the “ultimate goal” of reform and whether it seeks to change financial institution’s sizes or business models, Tarullo said firms have already been making adjustments to the size and composition of their balance sheets for both regulatory and business reasons. He said regulators do not have specific changes in mind for the firms to undertake, and that firms will make their own decisions as reforms are put in place to make the financial system safer.
Liquidity Requirements
Tarullo discussed the implementation of capital and liquidity rules, noting that there were no quantitative liquidity requirements before the financial crisis and that the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are now working to ensure that financial institutions are not caught again with long-term illiquid assets and short-term liabilities that make them susceptible to runs. While acknowledging that work remains to be done on this front, he said the banks’ resilience in the aftermath of the Brexit shows that the LCR has put them in a better position to handle stress.
Countercyclical Capital Buffer
An audience member asked about the Bank of England’s decision to reduce its countercyclical capital buffer for U.K. banks to spur the economy and generally about lifting capital requirements to promote growth. Tarullo explained that the countercyclical capital buffer allows regulators flexibility to dial up or down the capital requirements based on market conditions. He commented that the Bank of England was among the first regulators to raise the buffer, and that it is only adjusting it downwards now because of the Brexit referendum.
Physical Commodities
Asked about the Federal Reserve’s rulemaking on bank ownership of physical commodities, Tarullo stated that the Fed is seeking to address the relative risks of trading in physical commodities, and that the Fed has the ability to change capital requirements with respect to these commodities.
Financial CHOICE Act
In response to a question about risk-weighting in light of House Financial Services Committee Chairman Jeb Hensarling’s (R-Texas) Financial CHOICE Act, Tarullo stated that risk-weighting allows regulators to address different risks within a portfolio. He warned that simply relying on a higher leverage ratio would incentivize banks to take more risks since capital requirements would not change, and that the proposed 10 percent level would have to be “substantially higher” for regulators to be comfortable with it.
Cumulative Impact and Interaction of Regulations
Asked about the European Commission’s recent Call for Evidence on the interactions of post-crisis reforms and whether the U.S. should pursue a similar exercise, Tarullo answered that the Federal Reserve is already doing assessments of capital and liquidity requirements, and that it is always open to other experts doing their own analyses. However, he said it is not realistic to look at the cumulative impact of all post-crisis rules and try to model all their interactions and adaptive behaviors.
For more information on this event, please click here.