U.S. Markets

Fed governor Brainard says 'premature' to revisit liquidity, capital rules

FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge, Massachusetts, U.S. on March 1, 2017. REUTERS/Brian Snyder/File Photo

WASHINGTON (Reuters) - Federal Reserve Board Governor Lael Brainard on Thursday warned it was “premature” for regulators to revisit liquidity and capital requirements for the largest banks amid growing vulnerabilities in the economy.

In a speech outlining her position on the future of financial regulation in Washington, Brainard hardened a growing schism with Fed Chairman Powell and Vice Chair Randal Quarles, who last week voted in favor of recalibrating a key bank capital rule. Brainard voted against the proposal.

This week, Quarles also said it may be necessary to make similar changes to liquidity rules, suggesting nonglobal banks should not be subject to the same onerous liquidity requirements as global banks.

On Thursday, however, Brainard spoke out against the moves, saying rising asset prices and leverage signaled it was too early in the economic cycle to review these core rules introduced following the 2007-2009 global financial crisis.

“At a time when cyclical pressures are building and asset valuations are stretched, we should be calling for large banking organizations to safeguard the capital and liquidity buffers

they have built over the past few years,” she said.

It may be appropriate for the Fed to ask banks to build an extra counter-cyclical capital buffer (CCyB) if it proceeds with changes to the core capital and liquidity rules, she added. The Fed rule allowing for the creation of the CCyB was issued in 2016, taking into account the structural buffers established at that time.

“Thus, it would be prudent to accompany any consideration of material adjustments to the calibration of the structural buffers held by the large banking institutions with compensating adjustments to the countercyclical buffer in order to achieve the same overall level of resilience through the cycle,” she said at an event hosted by the Securities Industry and Financial Markets Association.

The Fed governor added that she was supportive of other efforts to tweak some post-crisis regulations, including the so-called “Volcker Rule” that bans banks from making bets on their own account, and efforts to reduce the burden for smaller banks.

Reporting by Michelle Price; Editing by Chizu Nomiyama and Jeffrey Benkoe