NEW YORK (MaceNews) – Given low interest rates, policy-makers should consider raising bank capital requirements and other regulatory steps means to shield the financial system in the event of another downturn, Boston Fed President Eric Rosengren said Monday.
Rosengren, in remarks prepared for delivery at a conference on bank supervision at the Norges Bank in Oslo, Norway, noted that the low interest rate environment in the US, Germany, Japan, and other developed countries means monetary policy has less room to respond with rate cuts, and that low rates will also make it more difficult to exit recession because households and firms have built up so much leverage.
“I am not sure that recent developments and proposals in bank regulation properly reflect the risks we are likely to face in a low interest rate environment that challenges bank profitability and provides less by way of monetary policy buffers,” Rosengren said. “Specifically, capital buffers should be rising now so that there is more room for them to decline if the economy falters. While this is true for the United States, it may be even more true in Japan and Europe.”
“I believe U.S. policymakers would do well to explore ways that policies could be used to prevent the buildup of leverage in a low-rate environment, hopefully reducing the macroeconomic spillover that could result from over-levered households and firms,” Rosengren said.
“Given the current diminished monetary policy buffer, recessions may be deeper and recoveries slower than what we have experienced historically, unless additional buffers are provided by fiscal, regulatory, and financial stability policies and deemed appropriate to utilize by policymakers.”