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2018-09-10 — bloomberg.com

Former Treasury Secretary Lawrence Summers called the results of the most recent Federal Reserve stress test of the largest banks "comically absurd," and called on regulators to boost capital at financial institutions.

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"If we are likely to live in a world of systematically lower interest rates, systematically more higher asset price multiples than we have in the past," then the case "for prudential regulation and for high levels of capital requirements in banks and more financial institutions is greatly increased," Summers said.

Continually low interest rates, a feature of the nine-year-old U.S. expansion where the policy rate is only 1.75 percent to 2 percent currently, can produce asset bubbles.

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The Fed asserted that if every bank continued to pay out capital in the form of dividends and share buybacks despite the severe scenario, "that none would have any capital deficiency." "That, I would suggest, is a comically absurd conclusion that is belied by the most elementary analysis of the beta of those major financial institutions," Summers said. "And the fact that that assertion continues to be made has to undercut whatever credibility one would would otherwise attach to the very substantial efforts that have been made to strengthen financial regulation."

Summers's criticism follows similar calls by officials such as Cleveland Fed President Loretta Mester, Boston Fed President Eric Rosengren, Kansas City Fed President Esther George and Fed Governor Lael Brainard to use the current period of strong growth and rising asset prices to ask banks to build up capital beyond the stress test requirements.

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