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Wall Street chief executives warned the Federal Reserve’s top regulatory official that the central bank’s calculations for bank safety were overstating risks and could damage markets in the latest sign of resistance to new rules.
According to people familiar with Wednesday’s private meeting between Daniel Tarullo, Fed governor, and executives including Lloyd Blankfein of Goldman Sachs and Brian Moynihan of Bank of America, the discussion was “open”, relatively calm and the banks came away hoping for some concessions from the Fed.
That is a change from a meeting last year when Jamie Dimon of JPMorgan Chase launched a tirade against Mark Carney, governor of the Bank of Canada, in a meeting over regulations.
Topping the agenda on Wednesday were recent “stress tests”, which banks believe overstated their losses in a hypothetical scenario in which the US unemployment rate surged and they suffered losses on European government bonds.
The Fed has shown it might be open to changing the structure of the stress tests, which banks have to pass if they want to distribute more capital to shareholders, allowing them more time and trying to increase transparency. But Fed officials have resisted giving banks open access to their models, which the banks claim are too harsh, because they fear the industry would “game” the system.
Separately, the executives, who also included Mr Dimon, James Gorman of Morgan Stanley, Jay Hooley of State Street and Richard Davis of US Bancorp, complained that proposed counterparty credit limits greatly overstated banks exposure to one another by failing to use proper net numbers. They said if one transaction was hedged with a second, the Fed was adding up the numbers, even though risk was reduced.
The meeting followed a speech given by Mr Tarullo earlier on Wednesday when he called for changes to international bank liquidity rules, warning they might have the effect of “exacerbating a period of stress by forcing liquidity hoarding”.
Mr Tarullo said it was right to impose rules on banks’ liquidity to guard against collapses at times of turbulent markets but the international Basel committee of regulators designing the rules should relax certain elements, a call that is likely to be welcomed by the banks.
In a speech to the Council on Foreign Relations, he said that the so-called liquidity coverage ratio “seems to me to overstate in particular the liquidity risks of commercial banking activities” and it should be absolutely clear that “ordinary minimum liquidity levels need not be maintained in the midst of a crisis”.
His remarks reflect a broader concern among global regulators that the liquidity rules could become a straitjacket for weak banks. The Basel Committee announced in January that unlike the capital requirements, which set hard minimums, the rules for liquidity will allow banks to dip into their buffers during times of stress.
Seen by the industry as a hawk on regulation, much of Mr Tarullo’s speech was given over to supporting reforms that banks oppose, such as the additional capital surcharge for the biggest groups.
He also proposed reforms of money market funds and the tri-party repo market, used by banks to lend to each other. Mr Tarullo said the huge amount of credit extended by the clearing banks, JPMorgan and Bank of New York Mellon, was “a major vulnerability” in the system and industry attempts to deal with the issue “fell short”.
Adair Turner, the chairman of the UK’s Financial Services Authority, and Paul Tucker, deputy governor of the Bank of England, have both called recently for reform of global repurchase, or “repo”, markets, which are backed with collateral but, regulators believe, can aggravate instability at times of market stress.