Simplifying the capital regime isn’t that complicated
By Karen Shaw Petrou
The Treasury Department’s sweeping report on regulatory reform includes the recommendation that the U.S. reduce its reliance on the advanced approach to large-bank capital requirements, favoring instead the standardized approach. Because this recommendation is included with a raft of other, often highly controversial proposals, many have overlooked its appeal. Backing away from the advanced approach for risk-weighting assets would mean moving on from a method that has had limited value; eliminating it has no downside risks. In fact, in our recent paper measuring the cost-benefit trade-off of the advanced approach, we found that demanding advanced models for risk — which is already well captured by the dozens of other capital rules — not only adds burden but also poses a lot of unintended risk. (The paper was funded by the Regional Bank Coalition, but reflects the views only of Federal Financial Analytics.)