A shake-up is in store for U.S. banking, following the revelation of more rigid capital regulations targeting large lenders. This move, orchestrated by the Federal Reserve, aims to buttress a financial framework made vulnerable by the collapse of several regional banks earlier in the year.
Beefing up the financial bulwarks
The Federal Reserve’s vice-chair for supervision, Michael Barr, has introduced a series of regulatory adjustments applicable to institutions possessing $100 billion or more in assets. These revised stipulations mandate that banks allocate additional capital to cushion potential losses.
These adjustments come in the wake of a series of large-scale failures of federally insured banks such as Silicon Valley Bank, Signature Bank, and First Republic.
These institutions all boasted assets over $100 billion, yet fell short of the existing $250 billion benchmark for stricter requirements. The failures stoked apprehensions regarding the stability of regional lenders.
The U.S. banking sector will observe a surge in capital requirements as a result of these changes, primarily affecting the most extensive, convoluted banks. Barr stated that these reforms significantly amplify our financial system’s resilience and prepare it to tackle emerging and unforeseen risks.
A key aspect of these new stipulations is the obligation for mid-sized banks to disclose the impacts of losses on their capital levels.
According to Barr, this will enhance the transparency of regulatory capital ratios, offering a more accurate reflection of the banks’ actual loss-absorbing capacity.
Silicon Valley Bank, due to its size, had previously been exempt from this rule, causing unexpected losses when selling assets, which alarmed investors and depositors.
The newly proposed banking rules consist of two components: the implementation of new international standards known as the Basel III endgame reforms, and a comprehensive review of capital rules announced last year.
While most jurisdictions implementing Basel reforms have applied them to all their banks, the U.S., boasting a more divided banking system with over 4,000 banks, has adopted a size-based tier approach.
The banking sector’s stocks remained largely unaffected on Monday, indicating that many of these changes had been expected and will be implemented gradually.
The opposition to stricter regulations in U.S. banks
However, these regulatory amendments have also been met with opposition. Prominent banking groups argue that heightened capital requirements could escalate borrowing costs and reduce loan availability for consumers and businesses.
In a subsequent discussion, Barr refuted these criticisms, stating that increased capital is what enables banks to lend to the economy and fortifies the financial system.
To augment these changes, Barr suggested adopting a more transparent and consistent methodology to evaluate banks’ individual credit and market risks.
This move would mark an end to the practice of institutions making their own risk assessments, which are often prone to underestimating potential issues.
In addition to this, Barr proposed expanding the scope of the Federal Reserve’s annual stress tests to assess a broader range of risks. He also expressed plans to revise a capital surcharge applied to global systemically important banks (G-Sibs).
This would involve modifying rules to curtail banks from manipulating their balance sheets temporarily to obtain a lower G-Sib surcharge. These proposed stricter banking regulations represent a pivotal step towards reinforcing the robustness of the U.S. financial system.
