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April 18, 2013

Fed Officials Back Higher Capital

A pair of Federal Reserve officials suggested Wednesday that major financial institutions may need to hold even higher levels of capital, a sign of a growing concern over the efficacy of current regulatory efforts to address the risks posed by large, complex firms.

Fed governor Jeremy Stein, speaking in Washington, said bigger capital buffers may be warranted as part of a solution to addressing whether some institutions are “too big to fail.” Federal Reserve Bank of Boston President Eric Rosengren, speaking in New York, also cited higher capital requirements, specifically for large Wall Street broker-dealers. Such firms played a central role in the 2008 crisis, Mr. Rosengren said, and “too little has changed to avoid a repeat of the problem.”

“‘The status quo represents an ongoing and significant financial-stability risk,’ Mr. Rosengren said. ‘Consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions.’

The comments come amid a broader debate in Washington over how to deal with large, complex financial firms that —four years after the financial crisis—continue to pose risks to the economy and be seen as enjoying an implicit government guarantee. Federal officials are trying to combat too big to fail by placing a burden on bigness and requiring large firms to hold higher capital levels, submit to Fed stress tests and provide documents detailing how to dismantle them in the event of failure. Regulators want firms to reduce their size and complexity, rather than dictating how companies should shrink.”

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Read full Wall Street Journal article here

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