WASHINGTON – The Federal Reserve should consider raising a capital cushion required when the economy is healthy rather than relaxing capital rules to limit the impact of a downturn, Federal Reserve Bank official says from Boston.

The counter-cyclical capital buffer – often referred to as CCyB – is a tool that allows the Fed to require banks with more than $ 250 billion in assets or $ 10 billion in non-bank liabilities to hold additional capital while economic conditions are strong to counter the high potential for riskier loans. .

But the Basel III rule has never been used in the United States, with Fed governors consistently voting over the years to keep the cushion level at zero percent.

Boston Fed Chairman Eric Rosengren on Monday proposed that in the future, regulators should reconsider activating the buffer while the economy is strong. Although Rosengren is not a member of the Federal Reserve Board of Governors, which votes each year on whether to activate the CCyB, his views could influence other board members.

Boston Fed Chairman Eric Rosengren on Monday proposed that in the future, regulators should reconsider activating the buffer while the economy is strong.

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“Rather than disrupting banks’ capital planning and relying on temporary relief from capital regulation, the CCyB provides a ‘buffer’ which, if properly implemented, would allow the funding of capital funds. borrowers to continue without these extraordinary and less predictable temporary measures, ”he said in his remarks. at an event organized by the Newton-Needham Chamber of Commerce.

The Fed took a number of steps early in the coronavirus pandemic to ensure that banks have sufficient capital to continue lending throughout the crisis. These included restricting dividend payments and easing the additional leverage ratio, which requires banks with more than $ 250 billion in assets to maintain an additional cushion of high-quality capital relative to their assets. totals.

“While these measures were necessary at the time, and therefore appropriate, in my opinion, they reflect a capital regime that is not flexible enough during an economic downturn,” said Rosengren. “Investors in banks and bank management teams would prefer to avoid the uncertainty of capital planning, and bank regulators would prefer not to suspend banking regulations in the event of an economic downturn.”

His take on the CCyB differs from that of Fed Vice President for Oversight Randal Quarles, who has long said that the CCyB is indeed activated in the United States because banks’ capital levels are already so high. .

During an event in March at the Peterson Institute for International Economics, Quarles noted that the Fed’s actions to ease the SLR were a “near denial” by the CCyB.

“When you look at some of these other jurisdictions that were able to activate their countercyclical capital buffer because of this tension and then turn it down, it didn’t turn out to be so helpful in creating the space. necessary for these institutions. to continue to lend during the crisis, ”Quarles said.

Prior to the COVID-19 crisis, Fed Governor Lael Brainard was a strong advocate for activating the CCyB, arguing it could strengthen the resilience of the banking system.

“One of the roles of independent regulators such as the Federal Reserve is to act as a counterweight,” she said in a 2018 speech.