October 9, 2014 - (Bloomberg) -- Risk to the financial system is possible even without firms that are deemed too big to fail, Federal Reserve Governor Daniel Tarullo said.

Tarullo, speaking in Washington today, also said international regulators will release some standards on capital and liabilities for big banks "relatively soon." The Financial Stability Board is considering how quickly to introduce a rule on total loss-absorbency capacity, or TLAC, for the world's systemically important banks.

"You can conceive of a financial system in which you could say with credibility no single institution is too big to fail, we could handle it, and yet there would still be systemic vulnerabilities," Tarullo said. One example would be a "funding structure that was very fragile, under margins in which runs were incentivized."

U.S. regulators want banks to hold more capital to withstand an economic shock. Tarullo reiterated that the capital requirements for big U.S. banks will be higher than what was agreed to by the 27-nation Basel Committee on Banking Supervision. That means risk-weighting could displace leverage as the main focus at some of the largest U.S. firms -- including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.

Tarullo said "we're still five years away" from full implementation of new rules for global banks. Resolution, or winding down a big failing bank, is still a "work in progress," he said.

The TLAC standard sets a minimum of capital and liabilities that can be written off, and is designed to make sure taxpayers are no longer on the hook when lenders fail.

Under an FSB proposal obtained by Bloomberg News, the TLAC rule will be introduced in 2019 at the earliest, though banks "headquartered in emerging markets will not, initially, be subject" to the requirement, which could amount to a quarter of a lender's risk-weighted assets.

Tarullo was speaking at a conference of the Bretton Woods Committee, a nonpartisan group that promotes international economic cooperation.

To contact the reporter on this story: Ian Katz in Washington at This email address is being protected from spambots. You need JavaScript enabled to view it. To contact the editors responsible for this story: Chris Wellisz at This email address is being protected from spambots. You need JavaScript enabled to view it. Mark Rohner