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The Editors

Bank Capital Rules Need More Than Fine-Tuning

The Fed's tweaks don't come to grips with the bigger problem.
Nice design, but are they strong enough?

Nice design, but are they strong enough?

Photo: Hulton Archive/Getty Images

Having spent nearly a decade crafting new capital requirements to bolster the resilience of the country’s largest banks, the U.S. Federal Reserve is getting ready to do some fine-tuning. The rules can certainly be improved -- but what’s needed is more than tinkering around the edges.

The Fed has two main tools to ensure banks have enough equity capital, the bedrock financing that lets them absorb losses and continue lending in difficult times. It sets minimum levels, and it conducts annual stress tests to see whether the thresholds would be breached in a crisis. Its new idea is to link the two together -- using the tests to help adjust the levels.