Fed's Tarullo Says Central Bank Is Considering 'Stress Test' Changes

CHICAGO—Federal Reserve governor Daniel Tarullo said the central bank could change the way its "stress tests" work for banking firms with close to $50 billion in assets.

Mr. Tarullo, providing a bit more detail than he has in the past, said the Fed is specifically rethinking the "capital planning" portion of the test, which oversees if and how the banks return money to shareholders through dividends and buybacks.

"We are trying to think of how we might reshape the capital planning part of it, which is more within our discretion, to make it somewhat less burdensome for the banks that are closer" to $50 billion in assets, he said during a conference on international banking at the Federal Reserve Bank of Chicago.

The Wall Street Journal reported in June that the Fed was seeking feedback on the tests, which apply to about 30 banks from Zions Bancorp., with about $58 billion in assets, to J.P. Morgan Chase & Co., which is the largest U.S. bank by assets more than $2 trillion.

The banks on the lower end of that spectrum have been pushing both the Fed and Congress to make the tests less costly for them. The tests examine a bank's ability to weather a recession, and the 2010 Dodd-Frank law mandates them for banks with more than $50 billion in assets.

On Wednesday, Fed Chairwoman Janet Yellen reiterated that she would support some modest changes to that part of the law, including possibly raising the $50 billion threshold.

Mr. Tarullo also agreed with Ms. Yellen's assessment that, for the very largest banks, the Fed isn't prepared to ease rules. "We think there is still work to be done with respect to the largest, most systemically important institutions," he said.

Separately, Mr. Tarullo pushed back against criticism of the central bank's rules for foreign-owned banking firms doing business in the U.S., saying the old regulatory approach allowed banks to pursue "unsustainable activity that eventually ran badly aground."

Mr. Tarullo, in remarks prepared for the conference, took on detractors who say the Fed's regulatory regime for foreign-owned firms has unnecessarily restricted the firms' flexibility to do business across borders.

The remarks didn't address the Fed's interest-rate policy.

Since the 2008 financial crisis, the Fed has forced global banks doing a large amount of business in the U.S. to consolidate their U.S. organizations into one holding company that holds more loss-absorbing capital to protect against losses in a downturn. Last week, the Fed proposed adding a new requirement that those holding companies issue loss-absorbing debt.

"The overarching guideline is that each jurisdiction should take responsibility for protecting the financial stability of its own markets as its contribution to achieving global financial stability," Mr. Tarullo said, repeating an argument he has made previously in support of the rules. The U.S. has a particular responsibility to protect stability, he said, because "the extent of this responsibility obviously increases with the size and significance of the jurisdiction's financial markets."

Mr. Tarullo also called for greater international cooperation on enforcing financial rules that global regulators have agreed to implement since the 2008 crisis. Countries that have expertise in jobs, such as assessing risky assets and running "stress tests," should share staff with countries that have less experience, he said. This will help countries trust one another if they have to deal with a crisis, he added.

Write to Ryan Tracy at [e-mail]

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November 05, 2015 15:55 ET (20:55 GMT)

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