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TCH Association President Responds to Bloomberg View Editorial on Capital Requirements

In a letter to the editor, Greg Baer, President of The Clearing House Association responded to a Bloomberg View editorial titled “Outlawing Bailout Won’t End Them.” In the response Mr. Baer rebuts the editorial’s assertions that enough hasn’t been done to make the financial system more resilient. The below response was published on Bloomberg Terminals on December 14, 2015.

Your editorial advocating “sharply increasing capital requirements” for large banks ignores a sizeable amount of recent history. Large banks now hold three times the capital they did pre-crisis – and even higher multiples more than the capital held by Bear Stearns, Lehman and other non-bank firms that failed. Of equal importance, to protect against runs, liquidity rules require large banks to hold up to 25 percent of their balance sheet in high-quality liquid assets (cash and Treasury securities) -- three times higher than pre-crisis levels. The sole basis you cite to justify higher capital requirements is that “[c]urrent rules require the largest U.S. banks to have only $5 in equity for each $100 in assets,”  but any such leverage measure ignores the fact that large banks hold a much less risky portfolio of assets than smaller ones: the aforementioned high quality liquid assets and, in their trading books, marketable securities rather than illiquid loans. So, unless you are prepared to contend that a 5% capital requirement against cash is appropriate, a leverage ratio is a highly misleading look at large bank capital adequacy. A more realistic look? The Fed’s recent stress test, which imposed a series of shocks worse than the last financial crisis, with a 50% stock market crash, unemployment over 10%, and a housing price collapse. The result showed that the largest banks would have more capital after such a crisis than they did before the last one, and all while continuing to lend as before. Those arguing that large banks are insufficiently resilient need to confront facts like these.

Greg Baer
President of The Clearing House Association

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