What’s the right amount of capital for banks to have on hand?
What’s the right amount of capital for banks to have on hand?
The Federal Reserve’s Vice Chair for Supervision, Michael Barr, said in a speech this week that capital is key to keep the country’s biggest banks from failing.
“Whatever the vulnerability or the shock, capital is able to help absorb the resulting loss and, if sufficient, allow the bank to keep serving its critical role in the economy,” Barr said.
This comes, of course, after several banks failed earlier this year.
Capital is money banks can easily get ahold of. Some of it’s cash, some of it’s loans they can call in. So, what might new requirements on capital mean?
It’s always a balancing act for regulators to figure out how much capital is enough, said Brookings Institution’s David Wessel.
“Michael Barr is saying, ‘I don’t think there’s enough now,'” he said. “And the banks are going to say, ‘We have enough. You’re punishing us.'”
Even so, Wessel said, the country’s largest banks will prepare to have more capital handy.
That means they might lend less, or be less likely to do share buybacks.
Banking industry consultant Merrill J. Reynolds said he’s not so worried about a lending slowdown.
“In most cases, there’s quite a bit of liquidity out there and banks have resources to still make loans,” he said.
In the meantime, any proposed rules on capital would have to be approved by the Fed, the FDIC and the Office of the Comptroller of the Currency, which would likely take several years.
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