The problem with the financial system is not necessarily one of too much or too little regulation, but misregulation–our system is designed with implicit and explicit bailouts that enable leverage. It’s more reactive than preventative. The editorial board of The New York Times came out against recent moves by the Fed to keep the current countercyclical capital buffer (CCyB) at 0%:
To force large banks to get ready for the bad times during the good times, the Fed created a tool after the 2008 crisis called countercyclical capital buffering. Banks borrow most of the money they lend to customers, but the Fed requires banks to obtain a small portion of their funding from sources that do not need to be repaid — for example, by selling shares to investors or retaining profits. These funds are called capital; the amount of capital is the amount of losses a bank can endure without defaulting on its obligations. Under the countercyclical policy, the Fed can order banks to increase these capital buffers in periods of economic growth.
This would seem like such a time. But this month, the Fed declined to act.
Not only is the editorial well-argued, but it could be an important shift in the way we think about financial regulation. While the editorial board’s focus is more on preventing a banking crisis that could stem from an economic downturn, there’s a free-market case for capital requirements that the editorial board would have done well to bring up.
Capital requirements are straightforward, relatively easy to enforce, and address the root cause of financial crises–excessive leverage–better than thousands of pages of regulations issued by alphabet soup agencies.
Again, the point of the editorial was to point out a specific policy solution, not reach across the aisle, but in today’s hyper-polarized political environment any opportunity to highlight the transpartisan nature of a given policy should be seized.