First, there is a danger that, in dealing with the technical challenges involved in measuring regulatory capital, we lose sight of the function of capital itself. Second, it is important that we not lose sight of the fact that while capital is only one, albeit important, indicator of an institution's overall health, it is also only one, albeit important, tool in our overall supervisory arsenal. Most regulators would hesitate to say that capital, even a mountain of capital, will guarantee a bank's stability or future solvency. Indeed, excessive capital can be almost as detrimental as inadequate capital, if it compels bankers to take greater risks to earn the hurdle rate of the return that the markets require. Some have argued that no amount of capital will salvage a bank that is grossly mismanaged.
Catastrophic events do occur, and when they do, all bets are off.
On the eve of the Great Depression, commercial bank capital was well in excess of regulatory minimums, sometimes by a factor of two or three. But it was all swept away by a flood of unanticipated losses. At the OCC, we have always tried to look beyond the raw numbers to interpret what those numbers mean for a particular institution, with its own peculiar risk characteristics. As a matter of policy, capital measurements should be determined objectively, consistently, and uniformly, but the interpretation of those measures is necessarily subjective and should be an adaptable component of overall supervision. Historically, bank supervision has always involved compromises and tradeoffs and trying to strike the optimum balance of intervention and detachment.