Banks Want Efficiency. Critics Warn of Backsliding.

Critics say that treating the countercyclical buffer as part of current requirements, instead of as a cherry on top, even risks permanently lowering capital requirements.

“I’ll believe it when I see it, that a Federal Reserve constituted like we have now will ever voluntarily turn on the capital buffer,” said Jeremy Kress, a former Fed regulator who now works at the University of Michigan. “It’s a backdoor reduction of capital.”

A proposal already underway will lower capital slightly, while making a hard cap on how much the biggest banks can borrow more flexible. Known as the “enhanced supplemental leverage ratio,” the measure was put in place to ensure that the eight largest United States banks did not overextend themselves with borrowed money, as some did in the lead-up to the financial crisis. The changes would give banks more room to borrow and bring United States rules in line with global standards.

Mr. Quarles has called it a “modest recalibration” that will ensure that banks’ capital requirements better reflect the risks to which they are exposed. Bank executives support the change, which could free $400 million of bank holding company capital — 0.04 percent of the total — for dividend payouts and buybacks, according to staff estimates.

Not all of the tweaks act on capital directly. For example, the Fed has also begun disclosing more information about its stress tests, which critics equate to giving banks the answers ahead of the test. Mr. Quarles takes objection to that characterization, saying the point of stress testing is to encourage strong capital standards, not to punish banks.

“Like a teacher, we don’t want banks to fail. We want them to learn,” he said in a July speech.

The Fed has also cut a qualitative component from most banks’ tests, one that checks in on their processes, rather than assessing numbers alone. Ms. Brainard voted against the move.

The risk with all the fiddling, experts say, is less that any individual change will burn down the house — in fact, banks and some lawmakers have urged the Fed to move faster. It is more that this gradual drip of deregulation points in one direction for the largest banks, and could undermine standards just as the expansion hits record length and the economy faces challenges.

Article source: https://www.nytimes.com/2019/08/20/business/bank-regulation-federal-reserve.html?emc=rss&partner=rss