Countercyclical Capital Buffer to Stay at Zero

Countercyclical Capital Buffer to Stay at Zero

Last week, the Federal Reserve Board voted to keep the current countercyclical capital buffer (CCyB) at a flat zero:

The Federal Reserve Board announced on Wednesday it has voted to affirm the Countercyclical Capital Buffer (CCyB) at the current level of 0 percent. In making this determination, the Board followed the framework detailed in the Board’s policy statement for setting the CCyB for private-sector credit exposures located in the United States.

A number of prominent economists have supported raising the CCyB, and while the Fed has a number of other concerns beyond macroprudential regulation, this decision is bad news for those concerned about financial stability. Aside from the recent stock market tumble, the economy is generally doing well, making this the time to force banks to hold more equity.

The Bank Policy Institute supported this decision, and echoed its argument that, “the Fed’s stress tests [last summer] have effectively increased capital requirements this year, so the CCyB does not need to be raised at this time, it just needs to be allowed to go below zero during a recession.”

Currently, banks are about 11% equity financed, which is better than in recent decades but far from the optimum of around 20% as determined by other research.

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By |2019-03-12T07:20:52+00:00March 12th, 2019|Blog, Financial Regulation|