Senator Warren Urges Fed to Activate Countercyclical Capital Buffer
Commentary by Sebastian Souchet
Senate Banking Committee Ranking Member Elizabeth Warren called on Lisa Cook, Chair of the Federal Reserve Board Committee on Financial Stability to activate the countercyclical capital buffer in light of "mounting systemic vulnerabilities" in the US financial system.
In a letter to Governor Cook, Senator Warren urged the Fed to reverse course from recent moves to ease bank capital requirements and instead require large financial institutions to hold additional capital during periods of elevated risk. She criticized the Fed for keeping the CCyB at 0% since its creation in 2013, noting that the Board "failed to even conduct a vote" on the tool for the past five years despite its own policy requiring annual review.
Senator Warren pointed to the Fed's April 2025 Financial Stability Report and other market data showing "concerning indicators" across several risk categories, including elevated stock prices, tight credit spreads, housing valuations comparable to pre-2008 levels, high corporate leverage, record hedge fund borrowing and rapid growth in opaque private credit markets. She linked these risks to economic headwinds from President Trump's tariffs—slower job growth, rising unemployment and renewed inflation—and argued that conditions warrant activating the CCyB, warning that weaker safeguards could leave taxpayers on the hook for major bank failures.
Senator Warren pressed the Fed to explain its failure to vote on the CCyB in the past five years and to disclose when a 2025 vote will occur. She further asked whether recent capital requirement rollbacks comply with the Dodd-Frank Act, how the Fed is assessing potential asset bubbles, bank–nonbank financial risks and whether systemic vulnerabilities are above normal.
Senator Warren requested a response by September 5, 2025.
Commentary
Senator Warren’s queries collectively raise an important question with respect to the threshold for activation of the CCyB: When exactly does the FRB consider “systemic vulnerabilities” to be “meaningfully above normal” such that the CCyB should be activated? The answer to this question is particularly important in light of the FRB’s findings in the April 2025 Financial Stability Report which, collectively, would appear to illustrate increased financial system vulnerabilities.
The FRB’s 2016 policy statement on the CCyB provides little clarity on the FRB’s standard for activation of the CCyB. Rather, the preamble to the policy statement explains that the “meaningfully above normal” standard “would reflect an assessment by the [FRB] that financial system vulnerabilities were above normal and were either already at, or expected to build to, levels sufficient to generate material unexpected losses in the event of an unfavorable development in financial markets or the economy.” The FRB’s policy statement further identifies that the FRB looks at various indicators to assess the vulnerabilities in the U.S. economy and financial system, “including but not limited to, measures of relative credit and liquidity expansion or contraction, a variety of asset prices, funding spreads, credit condition surveys, indices based on credit default swap spreads, option implied volatilities, and measures of systemic risk.”
Given the importance of the CCyB as a macroprudential regulatory tool, it would be valuable for the FRB to provide additional clarity and specificity regarding the circumstances under which it would consider activating the CCyB.