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The Fed’s Michael Barr proposed tougher capital rules for banks on Monday.
The banking industry has previously warned that more regulation could weigh on the economy.
A handful of US banks, including Silicon Valley Bank and Signature Bank, failed earlier this year.
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The Federal Reserve’s top regulatory watchdog had a warning for America’s big banks on Monday: the rules are about to get tougher.
On Monday, Michael Barr, the vice chair for supervision at the Fed, introduced a new set of proposals that, in his view, will minimize the risks for potential bank failures like Silicon Valley Bank.
“In an obvious way,” Barr said at the Bipartisan Policy Center, “the failures of SVB and other banks this spring were a warning that banks need to be more resilient, and need more of what is the foundation of that resilience, which is capital.”
Banks with at least $100 billion in assets will soon face higher capital requirements, meaning they’ll be forced to keep a bigger buffer of liquid assets on hand to protect against potential losses. It also means mid-sized banks could soon have to meet criteria that used to be reserved for larger institutions.
The rules won’t take affect immediately, but regulators will introduce them gradually over a phase-in period after taking comments on the proposed changes.
“The risk of contagion implies that we need a greater degree of resilience for these firms than we previously thought,” Barr said. “[T]he losses posed to society by the failure of a given firm are greater, and the probability that another firm may be a victim to another firm’s failure are higher.”
The banking industry’s main lobbying group, The American Bankers Association, isn’t thrilled with the proposal for tighter regulation. The trade group published an immediate statement after Barr’s speed expressing its disappointment, and saying that the Fed isn’t considering the downside to forcing banks to stashing more money than necessary.
“Higher capital requirements come at a cost to the economy, and regulators have other existing regulatory tools to manage risks including those that led to the recent bank failures,” Rob Nichols, the president and CEO of the ABA said.
In March, the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank sparked fears of a wider banking crisis. SVB, whose collapse was driven by mismanagement of its balance sheet as interest rates rose, fell in a matter of days in early March. JPMorgan stepped in to takeover First Republic, and in a classic rich-get-richer outcome, it expects to earn $3 billion more in net interest income this year as a result.
“The bottom line – these new Basel capital requirements would only make it harder for banks of all sizes to meet the needs of their customers, clients and communities,” Nichols continued. “Policymakers, who consistently cite the breadth and depth of our banking system as a source of strength, have not yet shown that these reforms will preserve that unique banking diversity or outweigh the significant costs to the U.S. economy.”
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