Fed’s Yellen Says Large Banks May Need Higher Capital

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Fed’s Yellen Says Large Banks May Need Higher Capital
The comic features features Fed Chair Janet Yellen as a contestant on the game show "Who Wants To Be A Millionaire". The audience behind Yellen, which includes former Fed chief Ben Bernanke, are throwing tomatoes at her. Caption for the comic: "After disappointing markets last week, will Yellen make it up to them later this year?" The Federal Reserve's decision last week not to raise interest rates disappointed most market players who were expecting the central bank to hike rates for the first time since 2006. The questions remains whether Yellen and the Fed will make it up to them at some point later this year, or will they delay the move to early 2016. The central bank has two more scheduled policy meetings before the end of 2015, in late October and mid-December.

Federal Reserve Chair Janet Yellen said “there might be room for stronger capital and liquidity standards for larger banks than have been adopted so far”.

In a video recording played Tuesday at a financial markets conference sponsored by the Federal Reserve Bank of Atlanta, she said other measures such as minimum-margin requirements for repurchase agreements and other securities financing transactions, could, at least in principle, apply on a market-wide basis.

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Yellen: Enhanced leverage ratio

Earlier this month, banking regulators took steps to raise leverage ratios for the largest banks in a bid to prevent serious issues from another 2008-like market crash. The largest banks, which will be required to keep $68 billion in reserve under the new plan, are said to have a significant combined exposure to OTC derivatives in excess of $400 trillion.

In January, the Basel Committee on Banking Supervision agreed to ease the leverage ratio, which is meant to rein in risky balance sheets from 2018. Leverage ratio measures how much capital a bank must hold against its loans and other assets.

Credit Suisse analysts felt that despite BCBS softening its rules, the Fed’s implementation of the Basel definition of leverage assets is a bit more onerous than anticipated.

Yellen: Room for stronger capital

Janet Yellen said Tuesday that a study by the Basel Committee on Banking Supervision “provides some support for the view that there might be room for stronger capital and liquidity standards for large banks than have been adopted so far. Tightening risk-based capital and liquidity requirements would, on net, provide economic benefits.”

She also indicated that though some of these steps, such as higher capital requirements would apply to the biggest most-interconnected firms, other measures such as minimum-margin requirements for repurchase agreements and other securities financing transactions, could at least in principle, apply on a market-wide basis.

The global Basel rules, known as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), are meant to help banks weather short-term funding crises.

Janet Yellen said in designing additional capital and funding measures, the Fed is carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation.

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