Big Banks face higher capital limits

Federal Reserve Vice Chair for Supervision, Michael Barr, has proposed stricter bank capital requirements in response to three major US bank failures earlier this year. Under Barr’s proposal, banks with assets of at least £100 billion would be subject to regulations similar to those currently faced by banks with £700 billion in assets. These regulations would necessitate banks to hold an additional two percentage points of capital, equivalent to an extra £2 of capital for every £100 of risk-weighted assets.

Barr highlighted the need for increased resilience in banks with assets of at least £100 billion, citing the risk of contagion that can spread to other institutions and threaten financial stability. Furthermore, he proposed that these banks should consider unrealised losses and gains in their available-for-sale securities when calculating their regulatory capital. This recommendation comes in the wake of criticism directed at Silicon Valley Bank for failing to account for unrealised losses, leading to insufficient assets to support liabilities during a bank run.

While stricter capital requirements can help mitigate risks during periods of stress, they may also limit banks’ ability to generate higher profits, as they would be unable to extend as many loans to consumers and businesses. Some industry representatives have disputed the role of inadequate capital in bank failures, but Barr disagrees, attributing the failures to an unsuccessful capital-raising attempt by Silicon Valley Bank that prompted uninsured depositors to scrutinize its capitalization.

Kevin Fromer, President and CEO of the Financial Services Forum, expressed concerns about Barr’s proposals, arguing that additional capital requirements for large US banks would result in higher borrowing costs and fewer loans, ultimately slowing down the economy. In contrast, Dennis Kelleher, CEO of Wall Street reform group Better Markets, commended the proposals, asserting that they would promote bank stability, lending, and economic growth.

More details regarding the new banking regulations are anticipated to be announced later this summer. However, it is expected to take several years for any changes to come into effect, as they must undergo the standard notice-and-comment rulemaking process.

In addition to discussing bank regulation, Barr also addressed the Federal Reserve’s efforts to combat inflation. He stated that the actions taken since the interest rate hikes began in March 2022, along with the recent pause, were part of a strategic approach to cautiously reach the Fed’s target of 2% inflation. Although progress has been made, Barr acknowledged that further work is required. It is widely anticipated that the central bank will resume raising interest rates at its upcoming meeting later this month.