Key to Financial Stability is Higher Capital Requirements, Policy Analyst Argues

There is no substitute for adequate capital requirements to maintain stability in the financial system, policy analyst Gregg Gelzinis argues on the latest episode of the Macro Musings podcast.

“The more capital you have, the less I think you need to rely on other regulations, whether they be liquidity requirements or risk management standards or single-counterparty credit limits, stress-testing, living wills,” says Gelzinis, who works on financial institutions, financial markets, consumer finance policy and other financial regulation issues at the Center for American Progress. “But it's a balance, so the higher you go in terms of capital, then the more comfortable I am in, if not completely eliminating, then winding down the stringency of some of those other rules.”

The Financial CHOICE Act, which passed the House of Representatives in 2017 but stalled in the Senate, would have rolled back complicated and arguably inefficient regulations imposed in the post-crisis Dodd-Frank legislation of 2010 while boosting minimum leverage ratios to ten percent. Some economists have proposed even higher bank capital levels of 15 percent or even 20 to 30 percent.

“Personally, I think maybe a 10 to 12 percent leverage ratio is the appropriate amount of capital, with all of the other bells and whistles we have today,” Gelzinis says. “Once we get into those upper echelons, then I'm okay really dialing it back a little bit. But the ten percent offered in the CHOICE Act wasn't high enough for me to feel comfortable in getting rid of all of those other prudential rules.”

Current rules on the banking sector “touch different parts of the balance sheet, different risks that banks pose,” he says.

“I think capital does trump all else, and that the higher capital we have, the more comfortable I am paring those back,” Gelzinis says.

“Where we are today in terms of bank capital levels, banks are fighting furiously each and every day, both on the Hill and at the regulatory agencies, to pare down that capital and actually lower capital, which is something that we've been fighting quite a bit lately.”

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