Smaller Banks Likely to Be Exempted from Increased Capital Requirements, Stated by Fed Chair Powell

Federal Reserve Chairman Jerome Powell assured that the new regulations requiring banks to keep more capital will not affect smaller institutions. Addressing concerns raised about tightening regulations for larger banks, Powell emphasized that the rules are still in the draft stage during his testimony before the Senate Banking Committee. However, he also acknowledged the potential impact of higher capital requirements on lending, highlighting the trade-off involved in promoting bank stability and strength. Powell clarified that banks with assets below $100 billion will not be subject to the new requirements, offering relief to Republican lawmakers. This means that only the top 25 or so banks in the U.S. would be affected by the rules.

The decision to re-examine regulations and impose stricter requirements follows the industry turbulence in March, where Silicon Valley Bank and two other regional banks were closed due to deposit runs. Lawmakers and regulators in the Biden administration have been advocating for a return to more stringent regulations, especially after providing relief to larger regional banks in 2018.

In separate testimony, FDIC Chair Martin Gruenberg stated that the upcoming rules could potentially apply Basel III international standards to banks with assets ranging from $100 billion to $250 billion. These changes are not expected to be implemented until 2024, and it may take several years for them to be fully implemented, according to Michael Barr, the Fed’s vice chair for supervision.

Powell emphasized that the capital requirements will primarily target the eight largest banks, with a possibility of some capital increases for other banks. Smaller institutions, however, will be exempted from these requirements. This represents a shift in Powell’s previous stance, where he supported tailored regulations for banks of all sizes. The American Bankers Association (ABA) criticized the reported 20% higher requirements, arguing that regulations should be risk-based and driven by data and evidence rather than arbitrary thresholds.

Despite concerns raised about the failure of Silicon Valley Bank (SVB), Powell faced relatively little hostile questioning. Senator Elizabeth Warren (D-Mass.), a frequent critic, held Powell accountable for the supervision team’s failure in the SVB case. In response, Powell acknowledged lessons learned from the episode and expressed the Fed’s commitment to taking appropriate steps to prevent similar situations and the spread of contagion in the banking system.