Authorities to increase Capital Requirements

Federal regulators in the UK are preparing to implement new banking regulations that would require major banks to hold up to 20% more capital, according to a report by the Wall Street Journal on Monday.

The proposed standards would vary based on the size and type of the bank, with the strictest requirements being imposed on large trading-focused institutions, including Goldman Sachs (GS). On average, larger banks would face a 20% increase in their capital requirements.

The aim of these stricter capital requirements is to enhance banks’ ability to withstand situations like the recent bank runs that severely impacted Silicon Valley Bank’s reserves in March. Capital requirements oblige banks to maintain a portion of their assets in liquid or easily marketable forms, ensuring they can absorb losses without collapsing and providing protection against bank runs and other risks.

Banking regulators have been exploring the idea of raising capital standards for several years, even prior to the series of bank failures this spring, which compelled the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation to take drastic measures to rescue depositors and stabilise the financial system to prevent a wider collapse.

In September 2022, the Federal Reserve and other federal agencies responsible for banking regulations expressed their commitment to adopting international standards and revising capital requirements for banks to strengthen the resilience of the domestic banking system.

However, banks have raised objections to these proposed regulations. The Financial Services Forum, a trade group representing major banks, released a report earlier this month arguing that higher capital requirements could have unintended consequences, such as increased borrowing costs for individuals and businesses. They suggested that such measures might drive people towards nonbank financial service providers for their needs.