Comptroller of the Currency Thomas J. Curry urged banking regulators to "remain vigilant" about maintaining reasonable levels of capital and liquidity that could cushion the blow in the next downturn.
In remarks at the Clearing House Annual Conference, Comptroller Curry highlighted lessons to be learned from the financial crisis:
- The Value of Strong Capital. Comptroller Curry asserted that after "six years of steady progress," the "banking system is now as well capitalized as at any time in professional memory." He acknowledged the criticism that capital requirements unduly restrict lending and limit economic growth, and recognized the criticism as a "legitimate policy question."
- The Danger of Excessive Leverage. Comptroller Curry admitted that strong risk-based capital ratios alone could not "ensure the safety and soundness of large banks," and described leverage ratio constraints – particularly the "more stringent" leverage ratios required of large banks – as a backstop to risk-based capital ratios. Comptroller Curry warned against excessive carve-outs, which he said would "cut against the very meaning of leverage" and erode market trust in leverage metrics.
- The Need for Ample Liquidity. Comptroller Curry stated that regulators implemented the Liquidity Coverage Ratio and proposed the Net Stable Funding Ratio in order to encourage covered banking entities to hold sufficient liquid assets to protect themselves against maturity mismatches on short-term obligations, and to move toward "more stable, longer-term funding."
- The Importance of Effective Supervision. Comptroller Curry argued that even though it is appropriate to reassess banking regulations periodically, regulators "must never settle for 'light-touch' supervision," since systemically important institutions would "face greater risk of breakup if the public believe[d]" that regulators were favoring the largest institutions over the smaller ones – by supervising the largest institutions "less rigorously," for example, or immunizing them from "remedial actions."
Comptroller Curry argued that regulators must (i) "remain vigilant about the levels of capital and liquidity," (ii) limit concentrations in historically problematic assets while guarding against the negative effects of underwriting, and (iii) raise governance standards at banks.
Comptroller Curry cautioned:
Those who have been in this business for more than one cycle know a downturn will come. Effective regulation and supervision will help ensure that the trough will not be so deep or so wide.
Commentary / Steven Lofchie
On the same day that Treasury Secretary nominee Steven Mnuchin asserted that the Dodd-Frank Act materially discouraged commercial lending to the detriment of the economy, Comptroller Curry argued that "heightened standards" have made banks safer. Comptroller Curry's far-too-late acknowledgment that capital requirements unduly restrict lending and limit economic growth, and his recognition that the criticism is a "legitimate policy question," is an indication that the debate is shifting.
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