The Anatomy of Global Debt

Since the crisis, new, far tougher capital requirements have been introduced for banks, and a set of macroprudential tools has been developed for regulators. The idea is that regulators should be able to “lean into the wind” of excessive credit expansions, by increasing the amount of capital a bank must hold, with the aim of dampening the supply of credit before it reaches a dangerous level. The increase might be imposed across the board, or focused on mortgage lending, for example, if growth in house prices looks worryingly rapid. Other alternatives could be to impose maximum loan-to-value limits, or minimum down payments on home purchases.

New authorities were established to oversee the use of these new macroprudential tools. The European Systemic Risk Board, chaired by European Central Bank President Mario Draghi, does the job in the European Union, and the Financial Policy Committee (FPC) of the Bank of England has domestic jurisdiction in the United Kingdom, though the Governor of the Bank of England is also Deputy Chair of the ESRB. (What will happen to that position after Brexit is unclear.) In the US, the Financial Stability Oversight Council (FSOC) is the coordinating body.

But there are important differences between them. The FPC is in some ways the most powerful of the three. It can impose a countercyclical capital buffer on UK banks, and has at times threatened to do so. For a time, the Committee took the view that unsecured personal lending was growing too fast.

The ESRB cannot act discretely, but it monitors EU and EFTA member states closely and publishes regular reports. The most recent review, last month, showed that additional buffers are in force in Sweden, Norway, Iceland, the Czech Republic, and Slovakia, in response to the particular credit conditions in those countries. France has since joined the list. In the eurozone of course, the ECB is the supervisor, so Draghi can put on a different hat and act directly, if necessary, through his own staff.

The US position is less clear. The FSOC is a coordinator, not regulator with its own powers. It is a bowl in which the alphabet soup of US financial regulators is stirred from time to time. It has no authority over its members and cannot impose countercyclical buffers. Its attempts to categorize large US insurers as globally systemic firms have been thwarted by the courts. There are those at the US Federal Reserve who wish it were otherwise, recognizing that without the support of the FSOC, which is chaired by the Treasury Secretary, they will find it hard, if not impossible, to dig into the macroprudential toolkit.

We must hope, therefore, that the Basel-based capital requirements imposed by the various US banking regulators are adequate. So far, the ratios have not been cut, though other deregulatory initiatives, proposed by Trump appointees in the relevant agencies, are in the works. Macroprudential policy may be working as intended in Slovakia, but it is unlikely to come to the rescue where it needed the most: in the world’s biggest financial market.