The U.S. banking system in 2016 is as well capitalized as any in the world as key industry participants continue to apply the basis lessons they learned from the financial crisis of 2008, according to Comptroller of the Currency Thomas Curry in a public address this week.
In a speech this week at Harvard Kennedy School, Curry said in the eight years since the crisis, the banking system has progressed to the point where it would be a mistake to change course.
“The hard work that U.S. regulators and bankers did in response to the crisis now has U.S. banks in a position of strength,” Curry said. “But my job is to ask how well we—regulators and bankers—are preparing for the next stress event or downturn. And, now is not the time to change course. We must remain vigilant about the levels of capital in good times so it will be there to serve as a bulwark during the next recession. We need to manage the risks of eventually increasing interest rates after this extended period of historic lows.”
Curry noted that the banks are stronger today, but that those who have been in the business for more than one cycle know that a downturn is inevitable.
“Effective regulation and supervision will help ensure that the trough will not be so deep or so wide,” Curry said.
The three basic lessons that the crisis taught financial regulators are the value of strong capital and its corollary the danger of excessive leverage, the need for ample liquidity, and the importance of effective supervision, Curry said.
“With regard to capital, our banking system is now as well capitalized as any in the world,” Curry said. “We achieved this level of capital through the concerted effort of regulators and bankers who recognize that stronger capital means stronger banks and that banks should grow their capital during healthier economic periods so that it is available during a downturn.”
Curry stated that the danger of excessive leverage is tied to insufficient capital levels, and leverage among financial services firms increased in the period leading up to the crisis—particularly at the “investment banking” firms such as Lehman Brothers.
“While it makes perfect sense for banks to hold capital levels commensurate with their risks through the application of aptly named risk-based capital standards, we also have long recognized that such measures are not perfect,” Curry said. “For this reason, we have employed leverage ratios to serve as an additional line of defense, or backstop, to the risk-based capital measures. As noted previously, we have taken a proportionate approach to constraining bank leverage by employing a slightly more sophisticated leverage ratio measure for the largest banks.”
A lack of liquidity was a key issue in the solvency issues that banking and finance companies faced in 2008, Curry said, but that problem has been sufficiently addressed by regulators.
“Since then we have taken steps in the right direction by implementing the Liquidity Coverage Ratio and proposing the Net Stable Funding Ratio,” Curry said. “These two ratios complement each other and push covered banks to hold sufficient ready resources to meet short-term cash outflows and encourage banks to shift to more stable, longer term funding by relying less on short-term wholesale funding.”