Capital standards most effectively protect banks from asset bubbles when they are “part of a system of prudential supervision for all financial institutions,” Federal Reserve Governor Sarah Bloom Raskin said yesterday.
“From the perspective of the hammer, everything looks like a nail. Similarly, from the perspective of the financial regulator, everything might look like a problem of insufficient capital,” Raskin said. “Instead, capital might, in fact, be sufficient but appear insufficient because of circumvention of compliance, or because of absent or delayed enforcement.”
She emphasized that regulators must not rely on formulas as a substitute for prudential supervision. “If regulators become fixated on the tools at the expense of compliance and enforcement, the tools themselves will be meaningless,” she said.
Read the speech.