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Risking Another Housing Crisis?

Forbes contributor Pedro Nicolaci da Costa examines how banks can fortify themselves against another meltdown. His article [1], da Costa cites Lael Brainard, Federal Reserve Governor, who suggests mandating higher capital requirements on banks—given the continued stability projected by the U.S. economy.

"At a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant," Brainard said in a speech last week.

Referencing the last financial crisis, Forbes indicated a majority of financial experts are in agreement that banks’ heavy reliance on debt to fund their operations was a key factor in brewing trouble within the housing sector.

Are Banks Recession Ready?

According to its Comprehensive Capital Analysis and Review [2], or Stress Test released in July, the Fed found that U.S. firms’ common equity capital ratio has more than doubled, rising to 12.5 percent at the end of Q1 2017 from 5.5 percent in Q1 2009, a total increase of $750 billion to $1.25 trillion. However, during the same period, the percentage of consumers who think credit will become easier to access over the next year declined, according to its Survey of Consumer Expectations.

In addition, the Federal Reserve ’s first Financial Stability Report [3] was released in December and assessed the resilience of the U.S. financial system and the triggers that can impact its stability. Speaking about the report, Jerome Powell, the Chairman of the Fed said, "Together, these reports contain a wealth of information on our approach to financial stability and to financial regulation more broadly. By clearly and transparently explaining our policies, we aim to strengthen the foundation of democratic legitimacy that enables the Fed to serve the needs of the American public."