HomeEconomic Newswhether the Federal Reserve will use new tools to deal with the economic downturn
whether the Federal Reserve will use new tools to deal with the economic downturn
August 15, 2019
Here’s the economic news that’s been discussed more recently, and whether the Federal Reserve will use new tools to deal with the economic downturn. Federal Reserve officials are weighing whether to adopt a tool that could reduce the risk of a credit crunch in a downturn. The tool, known as a counter-cyclical capital buffer, allows the Federal Reserve to require banks to hold more capital to absorb losses when the economy shows signs of overheating, or to require banks to hold less of that capital in a recession.
Capital buffers typically apply to banks with assets of more than $250 billion, including those such as JPMorgan Chase, Bank of America and Citigroup. So far, the Federal Reserve Board has not used the tool approved in 2016.Rules on capital buffers state that capital buffers should be raised when economic risks are “significantly higher than normal” and reduced when economic risks “weaken or decrease”. Now, some Federal Reserve officials are discussing whether the time has come to use the tool, which could provide banks with additional lending capacity in the ensuing downturn. It is unclear when officials will make a decision. “The idea of putting a counter-cyclical capital buffer into practice in order to reduce the deficit is something that other countries have already done and deserve to be considered,” Federal Reserve Chairman Colin Powell said at a news conference at the end of July.
” It is not an easy decision to decide whether the Federal Reserve will use new tools to deal with a downturn. Banks are reluctant to hold more capital than they do now because it could undermine their profitability. Banks’ profitability has come under pressure because of low interest rates. Moreover, it is unclear how the market will interpret the Federal Reserve’s move, especially since it will be the first time. Investors may find the cushion reliable because they believe the Federal Reserve is giving itself more room to fight the downturn,Or they may be uneasy about this, fearing that the Federal Reserve thinks a slowdown is imminent. Since last year, Federal Reserve officials have been discussing whether the federal reserve will use new tools to deal with the downturn. Now they’re asking another question: how to use it. Some officials have suggested launching the tool without raising capital levels, suggesting that the Federal Reserve is prepared to use the tool, if not immediately. Others argue that it is time to impose higher capital requirements. Either way, the Federal Reserve can choose to lower the reserve requirement ratio during a downturn. The President-appointed Federal Reserve board member, Lael Brainard, prefers to use buffers now to raise capital requirements for big banks. In March, she opposed the Federal Reserve’s vote to shelve the buffer. “Opening the buffer mechanism will create additional resilience and send a binding signal that will help curb the growing vulnerability of the system as a whole,” she said in a speech in May. Others say capital levels are high enough to be a weight for easing in difficult economic times. “We’ve always relied on high capital and liquidity requirements throughout the cycle, and I think the level of capital requirements is basically the same as it is now,” Powell said. Randal Quarles, the Federal Reserve’s vice-chairman for bank regulation, said at a conference in Boston in July: “The very low leverage in the financial sector offsets the overall risk to financial stability. Quarles and Powell agreed that the Bank of England’s approach could be a model in the US in the US, where countercyclical capital buffers are set at 1 per cent of risk-weighted assets when risk is “neither low nor high”, allowing the central bank to reduce risk when the economy is on a curve. Banks argue that buffers should not be used now because they are already regulated, including other capital requirements that ensure they are prepared for tough times. One example is the Federal Reserve’s annual stress test, which banks must pass to prove that they will continue to lend during the recession. At the same time, they encouraged the Federal Reserve to lower other capital requirements. If the central bank, as Powell and Quarles suggest, activate syvesive capital buffers while maintaining the same amount of capital in the banking system, it is likely to have to do so. The counter-cyclical capital buffer was created in 2010 by international regulators through Basel Committee on Banking Supervision. Several economies around the world, including Sweden and Hong Kong, China, are currently in use.Disclaimer: This article is excerpted from other websites and does not represent the views of this website.