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July 10 (UPI) President Joe Biden’s point man on financial oversight, Michael Barr, stated on Monday that the bank stresses observed earlier this year underscored the need for stronger capital controls. According to Barr’s “holistic capital review” of large banks before the Bipartisan Policy Center in Washington D.C., banks tend to underestimate their credit risk due to incentive-driven efforts to lower capital requirements.
During the first half of the year, a series of failures at U.S. banks, notably the collapse of Silicon Valley Bank, caused a mini-banking crisis. To prevent a repeat of past issues and address the risk of spillover, Barr proposed that the largest firms bring in an additional 2% worth of capital (equivalent to $2 for every $100 of assets).
Barr’s proposals would apply to banks with at least $100 billion in assets, extending coverage beyond current policies. Barr’s review revealed that while Silicon Valley Bank experienced rapid growth from 2019 to 2021, expanding its assets from $71 billion to over $211 billion, there were no triggers for heightened Fed supervisory or regulatory standards.
Former SVB CEO Gregory Becker testified earlier this year that rumors about the health of the banking sector spread quickly online, triggering a run on deposits. On March 9 alone, approximately $1 million was withdrawn from SVB every second.
In an April review of Silicon Valley’s collapse, Barr concluded that the board and management failed to manage risks effectively, and supervision was hindered by several factors, including reduced standards and a less assertive supervisory approach.
Barr is expected to present his proposals to policymakers later this year, but they are likely to face opposition. The CEO of the Institute of International Finance, Tim Adams, expressed puzzlement and criticized the potential constraints on the financial sector’s capacity to support growth and economic activity, especially at this moment.
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