The Fed’s $200 Billion Bank Stimulus Poses a Big Risk

The Federal Reserve is about to give America’s biggest lenders an extra $200 billion of capital to play with. Later this week, US regulators will launch fresh proposals to update and, in some ways, loosen US capital rules that will fuel stock buybacks, lending and trading. But there’s a danger here: Too much haste in deploying all this spare cash risks overheating the economy and housing markets in unhealthy ways.

Having so much additional capital will present the biggest banks with tricky choices. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley will each have to think twice about handing billions of dollars straight back to investors through stock buybacks — an expensive exercise because their shares are so highly valued. But all large lenders should be wary of growing their loan books rapidly because that almost always leads to higher bad debts as lending standards slip.