Fed’s New Capital Plan Stokes Skepticism
By John Heltman

WASHINGTON — Both banks and Wall Street critics supported the Federal Reserve Board’s proposal to implement a countercyclical capital buffer on megabanks — but the two camps offered widely differing visions on how the buffer would work in practice. The agency released a plan Monday that would set the buffer between 0% and 2.5%, allowing the Fed to raise capital requirements when it detects heightened risk in the financial system. Consumer advocates saw the proposal as a key element in preventing the next crisis because it gives the Fed a mechanism to compel banks to retain profits during good economic times…. But some industry observers are also concerned that the entire concept behind the countercyclical buffer is relatively untested. “The view that you can strangle procyclicality by throttling big banks is unproven, and when tested doesn’t work,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “You’re basic risk-based capital rule is, ‘You want to lend to subprime mortgages? OK, but it will cost you more.’ This is, ‘You want to lend to subprime mortgages? OK, now it’s going to cost you so much, we hope you won’t do it.’ That’s the difference.”