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ABA’s Keating: Too much capital can be counterproductive

Frank Keating

Frank Keating

American Bankers Association President and CEO Frank Keating said on Friday that while banks have become better capitalized since the recent financial crisis, it is possible to have counterproductive capital levels.

“Capital comes at a cost—both to banks and the economy at large in the form of forgone lending as institutions shrink to meet extreme capital-to-asset ratios,” Keating said, adding that the capital-to-asset ratio for American banks has increased 21 percent since the 2008 financial crisis, according to Financial Times. “Through retained earnings and new stock issued, U.S. banks’ capital increased $330 billion, and the regulators now want even more. It’s no surprise that loan levels in the U.S. and Europe have suffered over the past five years and will continue to do so with regulators’ demands for even higher levels of required capital.”

Keating said regulators “should not be surprised” that banks have adjusted to meet regulatory demands but added that banks are then blamed “for making rational decisions based on the rules that have been set by their regulators.”

“The banking industry and regulators share the goal of making the system safer,” Keating said, Financial Times reports. “Finding the right balance is critical. The debate should be on how capital rules –both leverage and risk-based–can be meaningfully improved instead of calling for a return to the age of black and white televisions and no internet. We all want more simplicity, but our world is no longer simple. It is time to find the right capital rules for the risks taken, regardless of an institution’s size or where it is located.”

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