How to Short-Circuit Procyclical Capital Rules
Earlier today, we sent you our analysis of a consequential Fed study showing how well U.S. banks weathered the pandemic and how post-2008 rules made this possible.  In short, one more notch in the Fed’s own belt signifying its banking-system success under not just a severely-acute stress scenario, but also the near-miss of the real thing.  However, as the Fed readily acknowledges and this study convincingly demonstrates, the rules governing big banks not only made them formidably resilient, but also resolutely procyclical.  As the U.S. central bank rewrites the regulatory-capital construct this year – and it will – it should abandon the failed concept of a counter-cyclical capital buffer (CCyB) in favor of what I call built-in counter-cyclical capital circuits.  Here’s what they are, how they would work, and why the Fed should come to count on them.

M041621.pdf