What do new capital requirements mean for the stability of the banking industry?
• The new law increases capital requirements for bank holding companies and systemic non-bank financial companies. These requirements will help reduce leverage (the amount of debt these companies hold) and provide a more stable financial system in the future. • For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital. • These requirements help ensure that bank holding companies will serve as a source of strength to their subsidiary banks rather than as a source of weakness, as we saw too often during the recent financial crisis. In general, why is capital so important — not only to the health of banks but also to strengthening the economy? • Just like the prudent consumer who puts money away for a rainy day, so too must the prudent banker. Capital is the cash a company has on hand — the equivalent of a household’s savings account. It lends essential stability to individual institutions and to our banking system as a whole. •
