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Fed votes against activating tool aimed at safeguarding banks

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The Federal Reserve decided on Wednesday against activating the counter-cyclical capital buffer - a tool that would require big banks to set aside extra money to absorb potential loan losses.

[WASHINGTON] The Federal Reserve decided on Wednesday against activating the counter-cyclical capital buffer - a tool that would require big banks to set aside extra money to absorb potential loan losses.

The Fed said its board voted 4-1 to keep the buffer at zero, with Governor Lael Brainard lodging the only dissent. The central bank is supposed to vote on the issue annually.

The US and other nations agreed to establish individual counter-cyclical capital cushions in the wake of the financial crisis.

Once triggered, the mechanism forces big banks to hold additional capital - as much as 2.5 per cent of risk-weighted assets - when times are good so they're better able to cover losses and keep lending when things turn bad.

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The Fed has said it will activate the instruments when it judges that vulnerabilities of the financial system are "meaningfully above normal.'' That's a higher hurdle than that set by some other central banks, which have made use of the instrument in recent years.

"In making this determination, the board followed the framework detailed in the board's policy statement for setting the CCyB for private-sector credit exposures located in the United States," the Fed said Wednesday in a statement.

In December, Brainard said it might be prudent to raise the buffer given that "cyclical pressures have been building and bank profitability has been strong."

A handful of regional Fed presidents, led by Boston's Eric Rosengren, have also argued that now is the time to trigger the tool, while the economy is still strong but risks to financial stability are rising.

But the decision on the capital cushion rests with the central bank's Washington-based board of governors led by chairman Jerome Powell, and not with the monetary policy-making committee that includes the regional Fed bank presidents.

The buffer would apply to fewer than 20 big banks, all of which have been forced to shore up their balance sheets significantly since the financial crisis.

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