Because of its seeming technicality – not to mention the summer doldrums – many may have missed a critical action last week by accounting regulators that, Karen Petrou argues, should push regulators quickly to realign the relationship between regulatory capital and loan-loss reserves. Her memo provides an overview of the reason why capital now largely discounts these reserves and why, with the shift from incurred to expected reserving, this should change. And change fast, she argues – unnecessary capital costs with no added prudential value only increase the cost of regulatory capital and, thus, the drag on credit availability from banks in key product areas.
FedFin later this week will issue a study on these costs, assessing the post-crisis regulatory-capital rules and others that can be reliably calculated with public, quantitative data. We have also compared these costs at year-end 2013 to those at the start of the crisis at the end of 2007, covering in our analysis six U.S. G-SIBs.
We look forward to your comments on this study. In the interim, please let us know if you have any comments or questions on the reserve vs. capital question by calling 202.589.0880 or email us at info@fedfin.com.