Now is not the time to fundamentally change regulatory course, but to continue maintaining bank capital standards, ensuring stable sources of liquidity, and providing effective regulation and supervision, the Comptroller of the Currency said Thursday.
In remarks to the Distinguished Banking and Finance Lecture Series at Central Connecticut State University, Comptroller Thomas J. Curry (whose term ends in April) pointedly noted that some people have questioned recently whether bank capital requirements “have gone too far.”
“Critics suggest that capital requirements restrict lending and hold back the economy,” Curry said. “While that’s a legitimate policy question, the (financial) crisis provided the troubling answer of what happens when banks fail to hold capital levels commensurate with their risks. In an economic downturn, undercapitalized banks are simply incapable of lending and restabilizing the economy.
“I, for one, do not want to repeat our experience of less than 10 years ago,” he added, “and I hope that others will not forget the benefits of a healthy banking system built on strong capital that can withstand a downturn.”
In other comments, Curry listed both the need for ample liquidity, and the importance of effective supervision to maintain a “resilient” banking system.
Curry reminded the group that, in 2008, a lack of liquidity played just as important a role in weakening the banking system as did inadequate capital levels. He said that safeguards developed since then — such as the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio – push banks to hold the resources needed to meet short-term cash outflows and obtain more stable, longer-term financing.
“These safeguards make the riskiest behavior more expensive, while minimizing the impact on less risky community banks,” he said. “We should take care not to undo these safeguards as we consider ways to make regulation less burdensome and to encourage economic expansion.”
Regarding supervision, Curry said that “seasoned regulators will agree with me that the most powerful means of affecting behavior and promoting a healthy risk culture among financial institutions is good supervision based on clear expectations.”