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 

Treasury plan to weaken capital rules has real economic costs

William R. Cline | senior fellow at the Peterson Institute for International Economics

Gregg Gelzinis — Treasury wants to weaken a crucial post-crisis capital requirement

A proposal by the Treasury Department that would allow large banks to exclude certain assets in calculating the leverage ratio is not only a misguided recommendation that would undermine post-crisis capital requirements for Wall Street. The recommendation also appears to be in direct contradiction with the leverage ratio principles outlined in the Treasury report’s own appendices.

On June 12, the Treasury released the first in a series of financial regulatory reports in accordance with an executive order signed by President Trump in February. Among the report’s worrisome recommendations is to modify the denominator in the Supplementary Leverage Ratio, or SLR. Specifically, Treasury recommends removing certain assets — cash held at central banks, U.S. Treasury securities and initial margin for centrally cleared derivatives — from what top-tier holding companies must include in maintaining a 5% SLR. This essentially makes it easier to meet the SLR requirement.

Here’s why that’s a problem.…

American Banker
Treasury wants to weaken a crucial post-crisis capital requirement
Gregg Gelzinis | special assistant for the economic policy team at the Center for American Progress