Fed’s Stein Says Regulators Need Resolve on Bank Capital

Federal Reserve Governor Jeremy Stein said U.S. regulators need to remain firm in forcing banks to raise capital in times of stress.

Regulators need an “institutional will” as well as legal authority, Stein said in a speech prepared for delivery in Boston today. “It is incumbent on us as regulators to do all that we can to develop both the intellectual case, and the institutional resolve, to be able to push back with equal force when the time comes.”

Policy makers and academics are debating whether monetary policy as well as regulatory controls should be used in response to financial stability concerns such as asset-price bubbles in the wake of the 2008 financial crisis, Stein said. While that question hasn’t been settled, more forceful action by regulators is clearly needed, he said.

For example, a banking firm facing a shortage of capital in time of crisis might prefer to shrink its size to meet regulatory capital levels rather than sell stock that dilutes existing shareholders, “even though the latter is more desirable from the perspective of aggregate credit provision,” Stein said at a National Bureau of Economic Research conference.

Stein didn’t address the current economy or current financial market conditions in his prepared remarks.

Stein warned in February that some credit markets, such as corporate debt, were showing signs of excessive risk-taking, and said the Fed should be open to using policy tools such as interest rates to safeguard stability. “We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” Stein said then.

Federal Reserve Bank of Kansas City President Esther George has dissented at every Fed policy meeting this year, warning the bond-buying program and near zero rates risk creating imbalances in the economy and financial markets and pushing up long-term inflation expectations.

Stein, a former Harvard University economist who specializes in banking and finance, joined the Fed in May 2012 for a term lasting through January of 2018.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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