MNI: Fed’s Mester-Larger Banks Can Handle Higher Capital

The largest U.S. banks are still in a position to handle tighter capital standards without compromising their lending capacity, Cleveland Fed President Loretta Mester said Thursday.

In a wide ranging speech offering an array of incremental suggestions to make the financial system more resilient, Mester said the banking turmoil of last March, which culminated in the collapse of Silicon Valley Bank, is a reminder that policymakers should not be complacent.

“In my view, at the larger banks, current minimum capital standards are still below the level where an increase would be counterproductive in terms of thwarting productive risk-taking, beneficial innovation, or economic growth,” Mester said in prepared remarks to a conference at Columbia University that did not touch on monetary policy.

Bank capital strengthens rather than crippling bank lending, she said.

“Well-capitalized banks tend to lend more than poorly capitalized ones, to grow their loan and deposit market shares during crises by purchasing assets from less well-capitalized banks, and to have more access to market funding during downturns than do less. capitalized banks,” Mester said.

She said high leverage has shown to be a major contributor to financial stress, and proposed bolstering the countercyclical capital buffer during good times in order to prepare for any deterioration of conditions.

There’s a “need to raise the buffer in good times before we see the vulnerabilities, yet we have never raised the CCyB above zero in the U.S.,” Mester said.

“The CCyB would be more effective and time consistent if it were recalibrated to be a positive level in normal times, and then raised when credit growth moves up and lowered when credit growth moves down based on a systematic rule that is agreed to in advance of stress.”