A capital management tool designed by the Federal Reserve to help banks and other financial institutions to absorb higher losses associated with declining credit conditions will stay at the its current level of 0%, the central bank said Friday.
The action essentially means the Fed will not require banks to hold more capital.
The board voted to affirm the “Countercyclical Capital Buffer (CCyB),” which it said can be used to “increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal future losses and when the banking organizations for which capital requirements would be raised by the buffer are exposed to or are contributing to this elevated risk–either directly or indirectly.”
According to the Fed, the CCyB is then available to help banks absorb the losses resulting from deteriorating credit conditions. The agency noted that use the buffer can also help moderate fluctuations in the supply of credit.
If and when the agency modifies the CCyB in the future, “banking organizations would have 12 months before the increase became effective, unless the Board establishes an earlier effective date.”
The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (Corp.) were consulted in the decision, the Fed said.