2023-07-27 18:17:35
According to him, high levels of capital increase the resilience of banks in times of stress and institutions could benefit from the new rules
The president of the Federal Reserve (Fed), Jerome Powell, defended the creation of stricter capital rules for banks with assets between US$ 100 billion and US$ 250 billion, in order to reduce banking risks in the United States. “The US banking system is robust and resilient. We must preserve and build on this strength and diversity,” he said.
The comments are part of a speech prepared for the meeting to discuss new proposals taking into account the Dodd-Frank Act and the Basel III international system. After the meeting, the US BC must publicly disclose the proposals for a consultation period of 120 days.
According to him, high levels of capital increase the resilience of banks in times of stress and, despite already having “strong levels of capital and liquidity”, American institutions could benefit from the new rules. Powell details that the purpose of the proposed changes is to achieve sensitive targets by addressing similar risks across banks, which may require eliminating the use of internal credit and operational risk models. “These are proposals that exceed the requirements of Basel III”, reveals the director.
However, Powell warns that there would be risks to this strategy, such as the rapid decline in liquidity and access to credit in critical markets, due to the increase in banks’ operating costs. This could cause the transfer of some activities to the shadow banking, warns the president. “We must ensure that anti-arbitrary benefits outweigh the costs of dealing with bank risks by discouraging risky operations,” he said.
Powell reinforced that, in order to calibrate the advantages and disadvantages of stricter rules, the US BC will be attentive to public feedback, in particular on how the proposals could impact activity in the capital markets and operational risks.
Proposal to raise capital of banks does not seem to bring benefits that justify it, says Bowman
Director of the Federal Reserve (Fed), Michelle Bowman positioned herself against the proposal to change the capital requirements of the large banks in the United States, to increase the resilience of the banking sector.
In an open meeting of Fed officials, Bowman pondered that “imposing the same rules designed for large banks on small banks is worrying”, and that there is no clear evidence that the benefits of changing regulation would justify the costs of its implementation. She points out that carrying out this cost-benefit analysis is fundamental to deciding on the new rules, and that it is necessary to judge whether the change in regulation will not increase the challenges of the banking system.
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In her speech, she says that the amendment proposal fails to take into account different capital structures and different risks. In addition, according to the official, raising the capital of all banks above US$ 100 billion in assets, as proposed in the change, could trigger a series of mergers, and a wave of bank mergers would cause harmful effects on competition.
For the credit offer, the proposal could reduce the availability and increase the credit price. “This effect would be tangible in banking activities,” he said, and those who would bear the costs of switching would be borrowers.
She argues that the current level of capital in the US banking system is already a strong point for resilience and stress tests, and that there is no evidence that raising the level of capital will solve the system’s shortcomings. “The amendment proposal does not make it clear what other changes could be proposed in capital regulation,” she said.
Bowman pointed out that he considers the American banking system strong and resilient, and that it remains much more capitalized than after the 2008 crisis. The recent bank failures are a consequence of weak risk management, he pondered, and not of capitalization. She thinks there’s still a lot to learn from the recent bank failures.
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Even so, she reinforces that she is “open to considering proposals to improve capital regulation”, and that “all rules must be reviewed, not just capital requirements” as long as a broad regulatory scenario is considered and how changes of capital would affect it. She positioned herself in favor of liquidity regulation and new prudential measures for bank resilience.
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