One reason that a lot of people are enamored with the Brown-Vitter approach to bank regulation is that it’s very simple, and everyone deep down sort of thinks that the simple answer has to be better than the complicated one. “You don’t need risk-based capital or stress tests or liquidity coverage ratios or VaR models or multiple tiers of capital or bail-in debt,” Brown and Vitter promise. “You just need to make sure that big banks don’t have assets of more than ~6x their common equity.”
Some people disagree1 and by all means feel free to question those people’s motives. Certainly some people benefit from complexity, bankers above all but also banking regulators, former regulators, and I suppose me too. Simple banking seems really boring, though maybe Brown-Vitter simple banking wouldn’t be.
Anyway that seems like the background to this interesting speech by Fed governor Daniel Tarullo about financial stability, which you could if you like read as sort of the Fed’s initial response to Brown-Vitter. And it’s not not that; the speech engages with Brown-Vitter on the capital stuff, basically defending the status quo of risk-based regulatory capital while conceding a little to Brown-Vitter’s call for higher capital.2
But he seems at least as focused on another source of systemic risk: not banks but wholesale funding markets, not capital but liquidity. You could see why the Fed might be focused there. Read more »