Sen. Sherrod Brown (D-Ohio) noted that banks could game the capital rules by using internal models to flatter their balance sheets. Regulators have historically allowed banks to weight assets according to their risk. This, in turn, determines their capital needs.

Tarullo said that liquidity and capital requirements under the Basel III regulatory standards make it more difficult for banks to game risk weighting. He also pointed out that the Fed has been conducting stress tests for firms over $50 billion.

“I think those three things together provide a quite solid base, each of which compensates for the potential shortcomings of the other,” Tarullo said.

Tarullo said the Fed is working to modify a bank-based capital model to cover insurance companies under Dodd-Frank.

“We’re not in a position to take account of that different business model in setting requirements,” Tarullo told the banking committee members. “I can assure you that we’re working as much as we can on tailoring risk weighting for unique insurance products. But we are a little bit confined here.”

Insurance-related holding companies were left out of capital rules approved by U.S. financial regulators this week. Tarullo said the regulators excluded them from the rule while they continue exploring the best approach.

Last Thursday, Warren and a small bipartisan group of senators introduced legislation that would break up Wall Street’s megabanks by separating traditional banking activities from riskier financial services.

“For half a century after the Great Depression, Glass-Steagall kept this country safe by separating the risky activities of investment banks from the basic checking and service and savings accounts that consumers rely on every day,” Warren said at the hearing. “Wall Street’s high-risk betting nearly destroyed the economy. But since then, we’ve made real progress with Dodd-Frank’s implementation. But despite this progress, the four largest banks are now 30 percent larger than they were just five years ago and they have continued to engage in dangerous high- risk practices.”

Warren and her colleagues hope the legislation can compel the financial sector to return to “the basics and try to keep the gamblers out of banks.”

The bill, called the 21st Century Glass-Steagall Act, shows the frustration of some lawmakers that banks have only continued to grow since the 2007 financial crisis. The other sponsors are Sens. John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine).

“Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” McCain said in a statement. The Arizona senator voted in 1999 for the Gramm-Leach-Bliley Act, which repealed Glass-Steagall.

The bill would reestablish elements of the 1933 Glass-Steagall Act, which separated traditional banks that offer checking and savings accounts insured by the FDIC from financial companies that engage in investment banking, insurance, and other investment vehicles and was overturned in 1999.