Treasury securities, etc.-to meet demand for 30 days in a stressful situation. That means banks have more than enough liquid assets-cash, reserves deposited at the Fed, U.S. Liquidity coverage ratios are above 100 percent, determined by bank internal stress tests. Tier 1 common equity ratios average over 12 percent for the largest banks, above the regulatory and stress test requirements. Fortunately, that’s where the system is now, thanks to the stricter regulatory regime put in place after the financial crisis, which requires more and better-quality capital, stress tests, and liquidity buffers, as well as better risk management practices on the part of financial institutions themselves.

Macroprudential policy actions to encourage banks to use buffers to support the economy can work only if the financial sector starts from a position of financial strength. (For a Fed FAQ on its guidance to banks, click here.) That would be better than an alternative suggested by some that the Fed should go further and temporarily relax regulatory requirements. The Fed now needs to make clear to banks how they can use their buffers without risking questions later about whether a bank was operating in a safe and sound manner.

bank holding companies currently hold capital and liquidity in excess of regulatory minimum requirements.

In its statement, the Fed emphasized that U.S. In addition to providing liquidity as the lender-of-last-resort, they are encouraging banks to draw on their capital and liquidity buffers to support credit flows if lending and other actions are taken in a safe and sound manner. The Federal Reserve has taken a number of recent actions to support the flow of credit to households and businesses during the COVID-19 crisis.

Clarify capital