29 August 2018

Financial Times: Fed debates banks’ capital buffers as markets surge

Jay Powell faces an intensifying debate within the Federal Reserve over calls for the central bank to boost big banks’ capital requirements to rein in financial risks — a move that would trigger fierce political blowback from Republicans eager to ease regulation.

Policymakers including Loretta Mester, the Cleveland Fed president, Eric Rosengren of the Boston Fed and Neel Kashkari of the Minneapolis Fed have advocated lifting the so-called countercyclical capital buffer (CCyB), a Fed measure aimed at bolstering global banks’ strength during periods when risks are rising in the financial system.

But the decision rests with the Fed’s board, chaired by Mr Powell, who insisted in June that there was no current need to lift the buffer because financial stability risks were under control.

The buffer, which is part of the post-financial crisis regime and has never been imposed in the US, would require big banks to build an extra margin of capital over a period of up to 12 months, giving them extra scope to support lending in a downturn.

“When conditions are good it is precisely when you want to increase it — that is the point,” Ms Mester said in an interview. The Fed had tools available to rein in market excesses, she said, but “you have to be willing to use them”.

Robert Kaplan of the Dallas Fed and Raphael Bostic of the Atlanta Fed said last week that they were analysing banks’ resilience and were open-minded about lifting the buffer. Mr Kashkari called the buffer “a peanut” and not nearly enough to curb banking hazards, but that it was “better than nothing”.

Boosting the buffer could propel the Fed into further conflict with the White House and Republican lawmakers at a time when the central bank is already under political fire from Donald Trump, US president, for lifting interest rates.

“It is moving in precisely the opposite direction that the president and his administration, [and] the Republicans on Capitol Hill, have been signalling — which is a push towards deregulation and less burdens on the banks,” said Sarah Binder, a professor at George Washington University.

The decision on the buffer will ultimately be taken by the Fed’s board of governors, including Mr Powell and Randal Quarles, the vice-chairman for financial stability, not the regional bank presidents such as Ms Mester or Mr Kashkari.

However, Donald Kohn, former Fed vice-chairman, said that “spots of exuberance” were becoming visible in the US, including in commercial real estate, lending to highly leveraged companies and in some asset values, meaning that a move should be on the cards.

Full article on Financial Times (subscription required)

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