BPI: Counterproductive Countercyclical Capital Buffer

Federal Reserve Governor Lael Brainard recently pointed to the countercyclical capital buffer (CCyB), an adjustable capital requirement surcharge imposed on large banks on top of existing capital requirements, as an important tool to address financial stability risks and enable monetary policy to focus on its core goals. Looking at the health of American banks, it’s hard to conclude their capital requirements aren’t high enough – they are liquid, well-capitalized and overall robust – but other monetary-policy dynamics may be at play in the prospect of raising the CCyB. FOMC participants calling for tighter monetary policy are likely arguing that low interest rates are supporting asset price bubbles, whereas those who favor the status quo may be promoting the CCyB as a tool to address bubbles, rather than tapering asset purchases and raising interest rates. But, as the Fed’s financial stability report observes, it’s not clear whether low interest rates actually cause bubbles or, if they do, that banks are exposed to the fallout from the bubbles popping. If low interest rates don’t contribute to financial risks, or if banks are not exposed to those risks, then requiring banks to fund themselves to an even greater extent with capital would be a drag on economic growth without a net benefit. Therefore, if the Fed raises the CCyB to keep its monetary policy easy, that action would undercut the growth that the easy monetary policy aims to support.

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