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In a letter made public by the Systemic Risk Council, it warned that proposals from the Federal Reserve Board and the Office of the Comptroller of the Currency about capital ratios, if enacted, would cause “the equity in US banks . . . to fall materially” and should be modified or replaced to protect the resilience of the financial system.
Sir Paul Tucker, a former deputy governor of the Bank of England, chairs the SRC. Its members include Sheila Bair, former chair of the Federal Deposit Insurance Corporation; and Paul O’Neill, former US Treasury secretary. Jean-Claude Trichet, former president of the European Central Bank, and Paul Volcker, former Fed chair, serve as its senior advisers.
The SRC letter argues that, while the regulators’ proposals would have the virtue of harmonising US and global capital rules, lowering effective equity requirements would be dangerous when markets and asset values are at a cyclical peak — the very moment when capital buffers should be the deepest. Furthermore, low nominal interest rates mean that the central banks have less power to stabilise the economy in the case of recession, making strong bank capital more important.
The SRC argues that if the proposals are carried out, they should be accompanied by a requirement that big banks issue an offsetting amount of subordinated debt that converts to equity in the event of losses.
Full article on Financial Times (subscription required)