Top US Banking Regulator Proposes Tougher Capital Rules for Large Lenders
In an effort to strengthen the financial system and address recent failures of regional banks, a top US banking regulator has announced stricter capital rules for a broader range of lenders. Michael Barr, vice-chair for supervision at the Federal Reserve, unveiled regulatory changes on Monday that would require institutions with $100bn or more in assets to adhere to harsher capital standards. These changes would necessitate banks to set aside additional capital that could absorb potential losses.
Barr explained that the proposals aim to prepare the financial system for emerging and unanticipated risks, such as those experienced by the banking system earlier this year. The failures of Silicon Valley Bank, Signature Bank, and First Republic, all of which had more than $100bn in assets, raised concerns about the resilience of regional lenders. However, they did not meet the current $250bn threshold for more stringent requirements.
Under the proposed rules, midsized banks would also be required to report the impact of losses on their assets on their capital levels. Barr stated that this would improve the transparency of regulatory capital ratios and better reflect the actual loss-absorbing capacity of banking organizations. This change comes in response to Silicon Valley Bank’s exemption from this rule, which caused alarm among investors and depositors when the bank suffered sudden losses.
The new rules are expected to increase capital requirements across the US banking industry, with a focus on the largest and most complex banks. Barr indicated that the rules would be implemented through two forms: the final adoption of new international standards known as Basel III endgame reforms, and a holistic review of capital regulations announced last year.
While the proposed changes were largely anticipated and will be phased in over time, bank stocks remained relatively unchanged on Monday. Barr emphasized that most banks already have sufficient capital to meet the new requirements, and those that fall short could achieve compliance within two years while still paying dividends.
However, the Financial Services Forum, a lobby group representing major banks including JPMorgan Chase, Bank of America, and Goldman Sachs, expressed concerns about the impact of further capital requirements. They argued that such measures would lead to higher borrowing costs and fewer loans for consumers and businesses. The lobby group urged regulators to carefully consider these implications.
Critics of Barr’s proposals included Greg Baer, president of the Bank Policy Institute, who stated that the changes failed to consider the potential costs to economic growth, credit availability, market liquidity, and the economy as a whole. Baer suggested a broader assessment of the impact on various sectors.
In response, Barr defended the proposed rules, explaining that capital is essential for building resilience in the financial system and enabling banks to lend to the economy. He emphasized the need for a more “transparent and consistent” approach to assessing banks’ credit and market risks and proposed expanding the scope of the Fed’s annual stress tests to evaluate a wider range of risks.
Barr also mentioned plans to make changes to the current capital surcharge applied to global systemically important banks (G-Sibs). He aims to reduce incentives for banks to manipulate balance sheets temporarily to achieve a lower G-Sib surcharge and to lessen “cliff effects” by reducing the increments at which additional capital is required.
However, Barr decided against adjusting how banks calculate their supplementary leverage ratios, which require large banks to hold capital equal to at least 3% of their assets. Lenders had lobbied for exemptions on treasuries and cash reserves, citing liquidity concerns in US government bond markets.
Overall, the proposed stricter capital rules for large US lenders aim to reinforce the financial system and mitigate risks. While concerns have been raised about the potential impact on borrowing costs and credit availability, proponents argue that increased capital requirements will enhance the stability and resilience of the banking industry.