Home / News / More banks will need to pad financial cushions under Fed proposal

More banks will need to pad financial cushions under Fed proposal

Aug 13, 2023Aug 13, 2023

July 10, 2023 Updated Mon., July 10, 2023 at 6:25 p.m.

The Federal Reserve’s top banking regulator wants to force some U.S. banks to increase their financial reserves, part of a broader push to shore up the industry after a series of bank failures in the spring shook confidence in the system.

Under a proposal being prepared by Michael Barr, the Fed’s vice chair for supervision, banks with at least $100 billion in assets would face capital requirements now applied to institutions with $700 billion in assets.

The United States currently has 30 banks with assets ranging between $100 billion and $700 billion.

“Our recent experience shows that even banks of this size can cause stress that spreads to other institutions and threatens financial stability,” Barr said Monday in a speech at the Bipartisan Policy Center.

Barr said most banks facing the new rules already have enough capital to meet the higher standard. And he said the Fed estimates those that don’t could build it up in under two years by socking away earnings while still maintaining their dividends.

The new standard would capture firms the size of Silicon Valley Bank, which had $209 billion in assets and ranked as the nation’s 16th largest when it collapsed in March, setting off a crisis that claimed two other banks. Barr said his proposal would require the largest banks to hold an additional $2 in reserve for every $100 of risk-weighted assets.

“These changes would increase capital requirements overall, but I want to emphasize that they would principally raise capital requirements for the largest, most complex banks,” Barr said.

Barr’s effort is already meeting resistance from bank lobbyists, who argue tougher capital requirements will force them to charge borrowers more and crimp lending overall.

“Capital isn’t free,” Financial Services Forum CEO Kevin Fromer, whose group includes chief executives of eight large banks, said in a statement. He said the proposal would have the effect of “slowing our economy and impacting those on the margin hardest.”

While Barr’s initial plan could debut this summer, it would need to go through a formal rulemaking process that invites public feedback, and Barr said any changes will take “at least several years.”

The Fed was already working on pitching stricter capital rules when the crisis hit this spring, as part of a years-long effort to standardize banking requirements around the world. But Barr said that the banking failures highlighted the need for the changes.

“Some industry representatives claim that inadequate capital had nothing to do with those bank failures. I disagree,” he said. “It was an unsuccessful attempt by SVB to raise capital that caused uninsured depositors to look more closely at how the bank was capitalized.”

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