Capital requirements are important to ensure that externalities associated with a bank’s failure are borne by the bank alone. However, there are both private and social costs associated with requiring banks to hold more capital. Empirical and theoretical evidence indicate that there are significant trade-offs in requiring higher levels of bank equity capital. Policymakers should seek to identify the costs and benefits of requiring more capital at banks and calibrate rulemakings accordingly.
As banks and other market participants were under-prepared for the liquidity challenges of the crisis, heightened focus on liquidity is justified. However, regulators should be wary of how new liquidity regulations interact with capital rules, impact greater risk management practices, and drive liquidity risk to the shadows.
Margin requirements for uncleared derivatives are intended to reduce counterparty credit risk, limit contagion, and incentivize the central clearing of derivatives trades. However, they risk fueling potentially negative outcomes such as straining market liquidity and subsequently driving activity to the shadows. In addition, the ambiguous scope of their extraterritorial application threatens to introduce new forms of uncertainty and legal risk into cross-border transactions.
Executives from Capital One, Comerica, Fifth Third, KeyBank, and U.S. Bank weigh in on the most important issues impacting regional banks, including their growth strategy, competitive challenges, the regulatory environment, the U.S. economic outlook, and how the regulatory framework can be better calibrated to address the risks posed by regional banks.
Financial market infrastructures are hubs that enable the global flow of capital. Maintaining their continuity in the face of a G-SIB’s failure is critical to sustaining economic stability. New rules promise to make FMIs more resilient while minimizing the chances that they could become propagators of financial stress.