At the Fed, increasing talk of activating countercyclical capital buffer
By Polo Rocha
Regulators are debating whether the Federal Reserve should pull a new tool out of its capital toolbox to protect against economic downturns. Banking experts are divided on whether the industry’s existing stress tests already fulfill this need. The countercyclical capital buffer, or CCyB, would require banks to build up larger capital buffers so that they can continue lending if the economy sours. Countries outside the U.S. have deployed the CCyB to try to lessen the blow of a future economic decline. …There are some critical differences between the U.S. and other countries, said Karen Petrou, the co-founder of Federal Financial Analytics, an industry research firm. For one, she said, some countries rely “almost exclusively” on banks for their financing, whereas financial activity in the U.S. is much more reliant on nonbanks. In products where nonbanks play a heavy role, such as U.S. mortgage origination, the CCyB “would have no impact” other than to push more activity to nonbanks, she said. Petrou said other countries have less strict criteria, so “markets aren’t particularly spooked by” regulators deciding to turn to the CCyB. But in the U.S., she said, the Fed could send an alarm signal to the markets by activating the tool — or even suggesting that financial risks are more than moderate. “That complicates their use of this trigger a great deal more,” she said.