Bank Capital and Stress Testing
A key element of maintaining the safety, soundness, and stability of the banking system is ensuring banks hold capital of sufficient quality and quantity to absorb the outsized losses that typically accompany periods of financial stress. Banks today have significantly increased the amount of high-quality capital they maintain relative to the period prior to the financial crisis. While there is a benefit to banks retaining a sufficient level of capital, beyond a certain point, additional capital requirements for banks result in excess capital that is not necessary to meet any quantifiable safety and soundness need, and that otherwise could be utilized for lending and sustainably growing the economy. TCH applies an empirically based approach that advocates for capital levels that ensure safety, soundness, and financial stability without impeding the essential functions of banks that fuel economic growth. Similarly, TCH engages in advocacy to promote effective stress testing to help ascertain the appropriate capital levels for banks.