#capital requirements

12 11, 2024

Karen Petrou: Why Banks Should Want New Capital Rules

2024-11-12T12:02:42-05:00November 12th, 2024|The Vault|

Ever since the election, a lot of bankers have loudly hummed “Ding-dong, regs are dead, the wicked capital regs are dead.”  There is no question that the wicked witch’s demise was warranted, but I’m not so sure about the merits of a similarly-ignominious and total end for the capital rules.  As FedFin reports make clear, too much in these proposals is wrong-headed, even as they may now be revised.  Still, it’s important also to remember that leaving the current rules unchanged leaves as is many provisions that are anachronistic or demonstrably conducive to shadow banking.  There’s never been a better time than now to think about how best to modernize large-bank capital rules without unnecessarily eviscerating large-bank competitiveness.  Here are a few ideas to start things off.

As I suggested in Congressional testimony, one of the silliest sections in the August 2023 capital proposal is the double-layered set of standardized approach (SA) credit-risk capital charges.  Current rules allow big banks to use the advanced approach to credit risk-based capital (RBC), but banks that do so must hold the higher of their own advanced conclusions or the standardized weight.  The proposal gets rid of the advanced approach but still requires banks to pick the higher of two SA options set by the regulators, not advantageous models.

Why have two standardized weights if one of them, while lower than the old weight, is based on what regulators have learned about risk since the old weights were posted in 2013?  If the second …

3 06, 2024

Karen Petrou: Important Lessons in Regulatory Impact

2024-06-03T17:00:05-04:00June 3rd, 2024|The Vault|

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules.  Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic.  It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules:  big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper.  In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009.  Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis.  So, stress tests began as an urgent reality check.  But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless.  Capital rules are now fanged …

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