How to Avoid Bank Safety’s Death by Many Cuts

(Bloomberg view) – Federal reserve aims to reduce cost -effective fluctuations in bank capital demands created by annual stress tests. However, while the Central Bank is politically weakened and some members of the board of directors seem willing to satisfy the White House. The Fed should be careful not to give much much by combating several different regulatory changes in a piece. Next month, the meeting of industrial leaders and organizers to discuss an integrated examination of the capital requirements of large banks announced by the FED on Thursday is a place to start.

Financial security is currently vulnerable. President Donald Trump supports more loose arrangements, hoping to encourage growth and oppress the republicans as a political focus on climatic risks and diversity efforts. At the same time, Trump is trying to weaken the independence fed to reduce the interest rates of Hoting President Jerome Powell. Kilit Board Members recently supported early interruptions.

Powell himself had to eat a modest pies on an extreme access perceived by the bank supervisors to influence industrial loan decisions through the reputation risk prism – now ordered to be removed from the bank assessments. The Central Bank also stumbled badly in the attempt to update the US capital rules and to sleep with the international basel standards that led them to a humiliating climb by American regulators last year.

This year’s stress test results will be published today and the FED can also update the markets about how the results are applied for banks. Since 2020, the results of this test have been used to calculate the minimum capital requirements of large banks between one and a half, but the relevant quantities have changed crazy because the tests are different every year. JPMorgan Chase & Co., Goldman Sachs Group Inc. And the rest saw the capital needs of billions of dollars fluctuating.

They sympathize with complaints about the rules, costs and uncertainty on the FED, plans to use an average two -year results to limit variation. Normally, banks should meet three months after their new requirements are determined: the results are released in every June until October. The industry wants a stage until the end of the year. This logical softening can help banks plan the system without weakening the safety of the system.

However, lobby groups and Bank Policy Institute, such as the Financial Services Forum representing the eight largest lenders, want more. First, they wanted banks to allow them to fully benefit from any deduction in the requirements when using average to limit any increase. The argument is that the cost of adding capital is asymmetrical and therefore is a reason for the average asymmetric.

Obviously, it serves by itself. It tends to support movements towards less capital over time. It is also only one side of the argument: the Fed has asymmetry to release self -esteem, which must be worried about, which pose an additional risk for the stability of the system. The less the capital is required, the higher the chances of covering all the losses and failures of some banks. Average, if used, both aspects should be applied.

The cost of extra demands is currently a bit academic, because the largest banks have significant extreme self -equipment on needs, and this year’s test was less laborious than last year, so it is expected to mean a deduction for most banks.

The industry also has more important, longer term changes in the request list. First, it is more transparency in how stress tests feed the FED to calculations of capital needs. The process has become more opaque and less predictable in recent years, which has damaged banks. However, the argument against too much transparency is that lenders can play the result. Worse than that, they want to use it to challenge the Fed’s decisions. “It will ensure that companies are re -evaluated in a significant way. [capital] The requirement said, ”FSF wrote a letter to the policy makers on Monday.

This would be a mess. There are problems with optimism, but the regulators must have some power and discretion. Their work is not to depend on taxpayers and costly appeals and arguments to the financial system every year.

Another industry complaint is the double of the basic risks between the capital requirements determined by the stress test and the fundamental minimum flowing from the wider US capital rules. This was a fair complaint and was a major problem with the Fed’s proposal in 2023 to update US rules in accordance with international standards. This proposal, nicknamed Basel Basel III Endgame ında in the USA, is rewritten after it was withdrawn last year.

However, the answer is not to weaken the capital obtained from the stress test – especially before the completion of America’s “last game”. The best solution is to re -examine these elements as a single study and provide a result that determines fixed and safe capital levels efficiently and understandable (as much as possible).

In my opinion, the majority of the capital requirements of banks should be determined in accordance with the main capital rules (Basel endgame), such as other countries. If individual banks are more risky than peers than peers or fall into risk management or management to endanger their survival, the regulators must have the authority to introduce extra requirements. Stress test must be a warning system for excessive or unusual risks – a sensory control of what the main capital rules say to us about the security of banks. If this is the case, discussions on average or transparency will be indifferent.

Michelle Bowman, a member of the FED Board of Directors responsible for the bank rules, has recently been transformed into interest rate deductions – supported a holistic examination of how capital rules such as industrial managers work together. This would be better than bargaining that may cause financial security to die.

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This column reflects the author’s personal views and does not reflect the opinion of the Editorial Board or Bloomberg LP and owners.

Paul J. Davies is a Bloomberg view columnist covering Banking and Finance. Previously, he was a correspondent of Wall Street Journal and The Financial Times.

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