Economy Watch: New Rules in the Works for Very Large Banks

By Dees Stribling, Contributing Editor

In testimony before the Senate Banking Committee this week, Daniel Tarullo, a member of the board of governors of the Federal Reserve, said that the central bank wants to change regulations governing too-big-to-fail banks (or GSIBs, global systemically important banks, in Fed-speak). He didn’t offer many details of the plan, however. In his capacity as a member of the board of governors, Tarullo is the vice chairman of the Federal Financial Institutions Examination Council. Eight American banks are GSIBs: Bank of America, Bank of New York Mellon, Citigroup, Goldman Saches, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

“The financial crisis made clear that policymakers must devote significant attention to the potential threat to financial stability posed by our most systemic financial firms,” he said. “Accordingly, the Federal Reserve has been working to develop regulations that are designed to reduce the probability of failure of a GSIB to levels that are meaningfully below those for less systemically important firms and to materially reduce the potential adverse impact on the broader financial system and economy in the event of a failure of a GSIB.”

Whatever the details, it seems likely that any new rules are going to cost GSIBs some money, at least in terms of higher capital buffers. Tarullo spoke of “graduated common equity risk-based capital surcharges on U.S. GSIBs,” which he called consistent with the Dodd-Frank Act, which stipulates that capital requirements be progressively more stringent as the systemic importance of a firm increases. “By further increasing the amount of the most loss-absorbing form of capital that is required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms,” he said. “This measure might also create incentives for them to reduce their systemic footprint and risk profile.”

FNC says home prices slowing

More evidence that U.S. residential prices are slowing down: FNC reported on Wednesday that its Residential Price Index for the nation’s 100 largest MSAs (100-MSA composite) was up 7.4 percent in July compared with the same month a year ago. The year-over-year change for this index has been falling since its peak in February of this year, when it came in at 9.4 percent.

The 100-MSA is also evidence that this is no bubble, even though prices are still rising. During the height of the 2000s housing bubble in 2004 and ’05, the index roared above 10 percent year-over-year to max out at 15 percent for most of 2005—after which it dropped precipitously. Values as tracked by FNC began to fall in 2008 and didn’t start rising again until mid-2012.

The month-over-month increase from June to July 2014 was 0.6 percent for the 100-MSA. The company’s other indexes (10-MSA, 20-MSA, 30-MSA) increased between 0.4 percent and 0.6 percent in July. None of the FNC indexes are seasonally adjusted, and are for non-distressed home sales (which excludes foreclosure auction sales, REOs, and short sales).

Wall Street had a positive day on Wednesday, with the Dow Jones Industrial Average up 54.84 points, or 0.32 percent. The S&P 500 was up 0.36 percent and the Nasdaq advanced 0.75 percent.