Banks must boost capital, not leverage: Fed official

Now that the Federal Reserve has reached its employment and inflation goals, the time is right for the U.S. central bank to take a broad look at its policy approach and its balance sheet, Kansas City Fed President Esther George said on Friday.

But it is not the time to go easier on big banks, she said at the Hoover Institution’s annual central banking conference, in what appeared to be pushback against comments made by Fed Governor Randal Quarles earlier in the day at the conference.

Quarles and Fed Chair Jerome Powell voted last month to recalibrate a key bank capital rule; the Fed Board’s third member, Lael Brainard, voted against it. George, who like all 12 Fed regional presidents does not get a vote on regulatory proposals, made clear her opposition.

“We should take advantage of the current economic conditions to bolster resilience in the financial system,” George said in remarks prepared for delivery at the conference, where she is sharing a panel with Dallas Fed President Robert Kaplan and Atlanta Fed President Raphael Bostic. The rule proposed last month would have the effect of lowering capital requirements, she said.

“With the U.S. economy in a sustained expansion and at risk of growing financial imbalances, this is a time in the credit cycle when global systemically important banks and other banking organisations should be building capital instead of increasing leverage.”

George, who has long been concerned that low interest rates could create financial imbalance that could make financial markets vulnerable to a new crisis, said monetary policy may have a role to play in battling possible asset bubbles.

That concern has helped shape her monetary policy stance to be more hawkish than many of her colleagues, supporting interest rate hikes much earlier than most at the Fed, and remaining wary of the risks of the Fed’s very large balance sheet.

On Friday George said the Fed should begin to consider how big a balance sheet it should ultimately maintain now that it has begun the process of trimming it. She also expressed support for rethinking the Fed’s 2 percent inflation target, a debate that is gaining steam among many at the Fed including San Francisco Fed President John Williams, who outlined several possible approaches earlier in the day at the Hoover Institution conference.

Fed officials say they may need a better strategy going forward to give them more power to address future recessions.