Some on FOMC panel say boosting bank capital during good times could reduce financial stability risks

Members of the Federal Reserve Board’s policy setting arm, besides intimating about the possibility of another rate hike in the medium term, noted during their July 31-Aug. 1 meeting that a move by large banks to grow their already healthy capital while conditions are positive could help guard against financial sector instability.

During its most recent meeting, the policy group – the Federal Open Market Committee (FOMC) – voted unanimously to keep the federal funds rate target, for now, at a range of 1.75% – 2%. The FOMC’s policy statement issued at the conclusion of the meeting described current monetary policy as “accommodative.” However, during discussion members indicated it “would likely be appropriate in the not-too-distant future to revise the Committee’s characterization of the stance of monetary policy in its postmeeting statement,” according to the minutes released Wednesday.

There was also some back-and-forth on the merits of activating the countercyclical capital buffer, which involves a capital surcharge on large banking organizations.

There were comments by some that asset valuations remained elevated and corporate borrowing terms remained easy. They also said regulatory changes made over the past decade had helped reduce the financial sector’s susceptibility to runs and helped strengthen the capital positions of banks and other institutions. A “few” participants, the minutes show, also “emphasized that financial stability risks could be reduced if these institutions further boosted their capital cushions while their profits are strong and the economic outlook is favorable; arguments for and against the activation of the countercyclical capital buffer as a means of further strengthening the capital positions of large banks were discussed in this context.”

The next FOMC meeting is scheduled for Sept. 25-26.  A Summary of Economic Projections and a press conference by Fed Chairman Jerome (“Jay”) Powell are slated in addition to the release of the policy statement on the 26th.

Federal Open Market Committee minutes