San Francisco Fed: Banks need bigger capital buffers

CHICAGO, May 24 (BestGrowthStock) – Banks need bigger capital
buffers to guard against larger-than-expected loan losses like
those experienced in the recent downturn, researchers at the
San Francisco Federal Reserve Bank said on Monday.

Lenders typically set aside reserves to cover potential
losses based on past experience with mortgages and other
loans.

But those reserves proved to be inadequate amid the sharp
decline in housing values that pushed many more householders
than expected into delinquency and foreclosure, the researchers
said in the latest San Francisco Fed Economic Letter.

“Even a more forward-looking provisioning process would not
have fully addressed bank vulnerability to the extraordinary
events of the past few years,” wrote Fred Furlong, a group vice
president in financial research at the San Francisco Fed, and
Zena Knight, a research associate.

“Guarding against such shocks is the role of capital. The
lesson of the financial crisis is that the buffer against
downside risk must come in the form of higher bank
capitalization.”

The argument that banks need to boost capital to guard
against future unexpected bursts of loan losses is in keeping
with the Federal Reserve’s so-called stress tests conducted
last year on the 19 largest U.S. bank holding companies.

Those tests resulted in calls for more capital at most of
the banks.

Some Fed officials want regular stress tests to make sure
banks are maintaining enough capital to withstand future
shocks.

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(Reporting by Ann Saphir; Editing by Kenneth Barry)

San Francisco Fed: Banks need bigger capital buffers