Quarles sees Fed’s zero CCyB as appropriate, also notes the flexibility of U.K. approach

Calling the current, zero countercyclical capital buffer (CCyB) set by the Federal Reserve the “current appropriate setting” for the CCyB, the Fed’s top supervision official on Friday also noted with interest the flexibility afforded under the framework in place in the United Kingdom.

Federal Reserve Vice Chair for Supervision Randal Quarles, speaking Friday before the Spring 2019 meeting of the Manhattan Institute’s Shadow Open Market Committee in New York City, discussed other countries’ CCyB settings and why they differ. He then moved on to the framework adopted by the U.K. Financial Policy Committee (FPC) to integrate the CCyB with its structural capital requirements.

“Specifically, under the FPC’s framework, the CCyB would equal 1 percent in standard risk conditions – but to avoid having this be a significant increase to already very high levels of capital, the FPC undertook a one-time adjustment to its other capital buffers in order to offset part of this increase. The effect of the policy is that the buffer can be varied – both up and down – in line with the changing risks that the banking system faces over time,” Quarles said in prepared remarks. “This approach is an interesting deviation from the idea in the original Basel discussions and the framework adopted in many other jurisdictions, in which structural capital requirements are set at levels aimed to deliver the desired level of resilience, with the CCyB raised to positive values only at times when vulnerabilities are above normal.”

Quarles said the U.K. framework seems to have provided added flexibility in that the FPC has adjusted the CCyB with evolving financial risks; he offered Brexit as an example.

“As I examine this experience, systems similar to the United Kingdom’s, where the CCyB is positive during normal times, may allow policymakers to react more quickly to economic, financial, or even geopolitical shocks that occur amid otherwise normal conditions, without relying on the slow-moving credit aggregates contemplated in the original Basel proposal,” he said. “Moreover, this setting of the CCyB permits more gradual adjustments in the CCyB, especially in periods with a high degree of uncertainty about the level of financial vulnerabilities…”

“Frameworks for the Countercyclical Capital Buffer” – March 29, 2019, Speech by Fed Vice Chair for Supervision Quarles before Spring 2019 Meeting of the Manhattan Institute’s Shadow Open Market Committee in New York, N.Y.