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William R. Cline — Treasury plan to weaken capital rules has real economic costs

Summary:
In the wake of the financial crisis, new regulations on bank capital and stress tests strengthened the ability of the major U.S. financial institutions to withstand shocks. The Trump administration’s plans to weaken capital requirements threaten to undo these gains. If they go forward, the financial system could again be dangerously vulnerable.The right amount of capital is a question of insurance: how much output to sacrifice in return for reducing the expected loss from a crisis. Equity capital is the buffer that enables banks to absorb losses without being forced into bankruptcy and damaging the wider economy. But extra capital, as my examination of the evidence shows, comes at a cost, and involves an output penalty. The challenge is to get this balance right.... American Banker

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In the wake of the financial crisis, new regulations on bank capital and stress tests strengthened the ability of the major U.S. financial institutions to withstand shocks. The Trump administration’s plans to weaken capital requirements threaten to undo these gains. If they go forward, the financial system could again be dangerously vulnerable.

The right amount of capital is a question of insurance: how much output to sacrifice in return for reducing the expected loss from a crisis. Equity capital is the buffer that enables banks to absorb losses without being forced into bankruptcy and damaging the wider economy. But extra capital, as my examination of the evidence shows, comes at a cost, and involves an output penalty. The challenge is to get this balance right....
American Banker | BankThink 
William R. Cline | senior fellow at the Peterson Institute for International Economics
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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