Central banker fires warning shot at ‘better tailored’ rules; urges big banks be pushed to keep capital buffers intact

A Federal Reserve governor warned regulators Thursday to push large banks to keep their capital buffers intact to avoid trouble during financial downturns, adding that even conditions today are “somewhat stretched.”

In remarks to the Global Finance Forum meeting in Washington, D.C., Fed Gov. Lael Brainard said that while making regulations “more effective and better tailored,” care must still be taken that “we do not inadvertently contribute to pro-cyclicality that would exacerbate financial conditions that are, on some dimensions, somewhat stretched.”

“At a time when cyclical pressures are building, and asset valuations are stretched, we should be calling for large banking organizations to safeguard the capital and liquidity buffers they have built over the past few years,” Brainard told the forum, a conference hosted by several securities industry trade groups. “Maintaining resilience over the cycle can be accomplished through a combination of structural and countercyclical buffers whose calibrations are inherently linked,” she added.

Brainard asserted that both history and experience illustrate that stable economic growth is aided by “strong regulatory buffers” which strengthen large banking organizations and act to reduce the severity of financial downturns.

“Although I believe it is too early today to reassess the calibration of existing capital and liquidity buffers because they have yet to be tested through a full economic cycle, I look forward to efforts that are planned in future years in the international standard-setting bodies to assess the framework quantitatively,” Brainard told the group.

Speech by Fed Gov. Brainard on safeguarding financial resilience through the cycle