Stricter Regulations Defined by Leading US Bank Regulatory Authority for Larger Financial Institutions

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In an effort to strengthen the financial system following the failures of several regional banks, a top US banking regulator has introduced stricter capital rules for a wider range of lenders.

Michael Barr, the Federal Reserve’s vice-chair for supervision, recently proposed regulatory changes for institutions with more than $100 billion in assets. These changes will impose tougher capital standards, requiring banks to set aside additional capital to absorb any losses.

Speaking at an event hosted by the Bipartisan Policy Center in Washington DC, Barr stated, “The comprehensive set of proposals that I have described here today would significantly strengthen our financial system and prepare it for emerging and unanticipated risks, such as those that manifested themselves in the banking system earlier this year.”

The failures of Silicon Valley Bank, Signature Bank, and First Republic, three of the largest federally insured bank failures in US history, provoked concerns about the resilience of regional lenders. Despite having more than $100 billion in assets, these failed banks did not meet the current threshold of $250 billion for more stringent requirements.

Under the new rules, midsized banks would also be required to report the impact of losses on their assets on their capital levels. Barr explained that this would improve the transparency of regulatory capital ratios and provide a more accurate reflection of banking organizations’ loss-absorbing capacity. The exemption previously granted to SVB due to its size resulted in unexpected losses when it sold assets, which caused alarm among investors and depositors.

Barr emphasized that the changes would primarily affect the largest, most complex banks, raising capital requirements throughout the US banking industry.

The proposed banking rules will be implemented through two forms: the final implementation of the Basel III endgame reforms and a comprehensive review of capital rules announced by Barr last year.

While most jurisdictions have already applied the Basel reforms to all their banks, the US has taken a size-based approach due to its fragmented banking system and numerous banks (over 4,000 in total).

On Monday, bank stocks remained relatively unaffected as many of the proposed changes had been anticipated and would be phased in gradually.

Barr stated that the proposed rules would require banks to hold an additional $2 of capital for every $100 of risk-weighted assets. He argued that most banks already have sufficient capital to meet these requirements and estimated that those lacking adequate profits could become compliant within two years while still paying dividends.

The Financial Services Forum (FSF), a lobby group representing major banks such as JPMorgan Chase, Bank of America, and Goldman Sachs, expressed concern about the impact of further capital requirements. According to FSF CEO Kevin Fromer, these requirements would lead to higher borrowing costs and reduced access to loans for consumers and businesses. Fromer called on regulators to carefully consider these implications.

Greg Baer, president of the Bank Policy Institute, another lobby group, criticized Barr’s proposals for failing to account for the “costs to economic growth, credit availability, market liquidity, or the economy as a whole.”

In response, Barr defended his position during a moderated discussion, stating, “Capital is about building resilience in the financial system. Capital is what enables banks to lend to the economy.”

Among the other changes proposed by Barr are a more transparent and consistent approach to assessing banks’ credit and market risks, ending the practice of allowing institutions to provide their own assessments, which often underestimate potential problems. Barr also suggested an expanded scope for the Fed’s annual stress tests to evaluate a wider range of risks.

Furthermore, Barr 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 their balance sheets temporarily to obtain lower G-Sib surcharges and lessen “cliff effects” by reducing the increments at which additional capital is required.

However, Barr chose not to make any adjustments to the calculation of banks’ supplementary leverage ratios, which mandate large banks to have capital equivalent to at least 3% of their assets (or 5% for the largest systemically important institutions). Barr rejected requests from lenders to exempt Treasuries and cash reserves from this calculation, citing liquidity concerns in US government bond markets.