Monday, October 30, 2017

William R. Cline — Treasury plan to weaken capital rules has real economic costs

In the wake of the financial crisis, new regulations on bank capital and stress tests strengthened the ability of the major U.S. financial institutions to withstand shocks. The Trump administration’s plans to weaken capital requirements threaten to undo these gains. If they go forward, the financial system could again be dangerously vulnerable.

The right amount of capital is a question of insurance: how much output to sacrifice in return for reducing the expected loss from a crisis. Equity capital is the buffer that enables banks to absorb losses without being forced into bankruptcy and damaging the wider economy. But extra capital, as my examination of the evidence shows, comes at a cost, and involves an output penalty. The challenge is to get this balance right....
American Banker | BankThink 
William R. Cline | senior fellow at the Peterson Institute for International Economics

1 comment:

Matt Franko said...

What good does it do to have a SLR as an additional set point when you have a CB that reserves the option to add $T of risk free assets in a few months as a policy?

It doesn’t matter WHAT quantitative ratio you choose if the Fed adds a $T the denominator surges and the banks are instantly insolvent ...

This person is not adequately trained in time domain analysis...