It is crucial for banks to maintain sufficient loss-absorbing capital buffers to weather the next economic downturn. Research shows, however, that bank capital levels are still too low. It is particularly important for regulators to address this issue promptly given the economy’s position in the business cycle.
The U.S. economy is in its ninth year of the post-financial crisis economic expansion. As with most prolonged expansionary periods, risks are building under the surface despite rosy topline economic figures. The Federal Reserve must tighten financial safeguards during this economic boom. The first step should be activation of the countercyclical capital buffer (CCyB)—an additional loss-absorbing equity buffer for the largest banks in the country.
The above excerpt was originally published in MarketWatch.
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