Setting the Record Straight: Recent Fed Decisions Do Not Weaken Large Bank Safety

22 Mar 2019
Read Time 2 mins
Categories :
Resiliency

A recent New York Times editorial offered a gross mischaracterization of the current American banking system and short-sighted criticism on three recent decisions by the Federal Reserve — decisions that reflect the safety and soundness of today’s large financial institutions and in no way weaken hard-earned improvements.

First, the Federal Reserve is adjusting its stress testing program to move the qualitative review of large banks’ capital planning processes into its year-round supervisory program.  This decision, which was first contemplated during the prior administration, was made precisely because of what the Fed has cited as significant improvements in the abilities of the banks to plan for their capital needs.  It is important to note that the focus of the Fed’s stress tests — making sure the banks have enough capital to weather financial storms — remains very much intact.  In fact, banks this year will be tested against a hypothetical economic scenario that contemplates a financial crisis far worse than what we experienced a decade ago.

Second, the Fed did not activate a capital buffer intended to reduce elevated financial risks simply because current conditions do not satisfy the Fed’s own test for activating it.  Indeed, Chairman Jay Powell Wednesday reiterated this point, arguing the Fed remained poised to activate the buffer if risks were “meaningfully above normal,” a threshold that he said had not been met.

Finally, the authors point to a proposal from the Fed to modify one capital measure.  This proposal was made to improve the efficiency and effectiveness of the capital rules.  The Fed has said the proposal would reduce capital at the bank holding company level – the source of strength for financial institutions – by just 0.04 percent.

Today, the eight largest, diversified financial institutions maintain more than $900 billion of capital, a nearly 40 percent increase since 2010.  We have doubled our liquidity, simplified our operations, and enhanced our risk management.

The nation’s largest banks provide critical services for families and companies of all sizes.  After a decade of improvements, we have demonstrated our ability to support the American economy for years to come.

 

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