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Inside Washington (06/06/2011)
* WASHINGTON (6/7/11)—Federal Reserve Board Gov. Daniel Tarullo on Friday defended an international proposal to levy an additional capital charge on the largest financial institutions. The Basel Committee on Banking Supervision has proposed a new set of capital standards that would require international financial institutions to hold a common equity ratio of at least 7% by 2019 (American Banker June 6). The committee also plans to add a capital surcharge for the largest banks. In a speech before the Peter G. Peterson Institute for International Economists, Tarullo dismissed arguments that the capital surcharge would hurt the economy. Banks say a capital surcharge would prevent them from earning the rate of return demanded by investors, forcing them to reduce their balance sheets and placing a drag on the economy. Tarullo said that logic is flawed. “To the extent that equity investors demand higher rates of return from financial firms than from non-financial firms, it is largely because financial firms are so much more highly leveraged,” he said. “Thus the risk of loss is greater, even as the prospect for outsized returns on the limited equity is improved” …


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