WASHINGTON — The improvements in the capital ratios of large U.S. banks since the 2008 financial crisis "are quite striking," and has placed them in a better position to finance the recovery going forward, Boston Federal Reserve Bank President Eric Rosengren said Monday.
In remarks prepared for delivery at a Bank for International Settlements Forum on the Basel III capital standards in Seoul, Korea, Rosengren argued that the measures passed to guard against a future meltdown — such as the 2010 Dodd-Frank Act — have "significantly increased the quantity and quality of capital expected to be held by banks."
He also stressed that the new supervisory tools now available to regulators, such a capital surcharge on banks considered systemically important, should not be used in isolation but instead incorporated into "a multi-pronged approach."
Rosengren, who holds a voting position on the Fed's policy-setting Federal Open Market Committee this year, did not comment on current monetary policy or the economy.
Some blame the extensive changes to the financial regulation, and the more stringent capital standards imposed on banks, for impeding the ongoing rebound from the 2008-2009 recession.
But Rosengren countered that "U.S. financial institutions are now well placed to finance the economic recovery, as many of the institutions have already recapitalized."
Financial institutions that are considered systemically important, commonly referred to as SIFIs, will have additional capital charges, and Rosengren said while the capital buffers should provide significantly greater capital than was held prior to the crisis, they do not seem excessive given the losses experienced at some of the largest U.S. financial firms.
And as far as the Basel III standards are concerned, the Boston Fed chief said the quality of capital held by large U.S. banks "has also significantly improved."
Citing a paper soon to be published by the Boston Fed that uses a panel of large, systemically important banks, Rosengren noted that Tier 1 common capital now accounts for a larger share of total risk-based capital.
In addition, while total capital has improved, "the particularly large increase in narrowly defined tangible capital highlights a significant improvement in loss absorption capacity," Rosengren said, adding that relative to the 7% minimum for Tier 1 common equity plus the capital conservation buffer, the banks that are reporting pro forma Basel III capital ratios for the end of 2012 have already reached this minimum standard.
"Furthermore, many of these large banks are now holding more than 8% Tier 1common equity on a pro forma basis," he said.
Rosengren cautioned, however, that high capital levels alone are not enough.
"Our results highlight the need for a multi-pronged approach that employs newly-developed supervisory tools — including stress tests, liquidity standards, and resolution plans — in conjunction with capital charges," he said.
"As we better understand systemically important financial institutions, we may want to better integrate lessons from stress testing and resolution procedures into capital requirements for the largest banks," Rosengren said.
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