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The Fed’s Vice Chair for Supervision Michael Barr said Monday that tighter controls may be necessary to avert another mini-banking crisis. File Photo by Ken Cedeno/UPI | License Photo
July 10 (UPI) — President Joe Biden’s point man on financial oversight, Michael Barr, said Monday that bank stresses from earlier this year warranted a need for stronger capital controls.
“Experience suggests that banks tend to underestimate their credit risk because they have a strong incentive to lower their capital requirements,” Barr said in a “holistic capital review” of large banks before the Bipartisan Policy Center in Washington D.C.
A series of failures at U.S. banks, the most notable of which was the collapse of Silicon Valley Bank, sparked something of a mini-banking crisis during much of the first half of the year.
Barr on Monday said the risk of a spillover, which was certainly apparent during the worst of the crisis, means firms need to be more resilient than in the past. In a tease of proposals that are expected later this year, he suggested that the largest firms bring in another 2% worth of capital — $2 for every $100 of assets — to prevent a repeat of past issues.
Barr’s handful of proposals would apply to banks with at least $100 billion in assets, far lower than what’s covered by current policies. According to Barr’s review, while Silicon Valley Bank was growing rapidly from 2019 to 2021, it went from $71 billion to over $211 billion in assets and without triggers heightened Fed supervisory or regulatory standards.
Former SVB CEO Gregory Becker told congressional leaders earlier this year that rumors about the health of the banking sector spread quickly online, triggering a run on deposits. On one day, March 9, about $1 million every second was withdrawn from SVB, he said.
Barr in an April review of the circumstances surrounding Silicon Valley’s collapse said the board and management didn’t manage their risks and that effective supervision was impeded by “reducing standards, increasing complexity and promoting a less assertive supervisory approach.”
Elsewhere, Barr found that Federal Reserve supervisors didn’t “fully appreciate the extent” of the bank’s vulnerabilities and didn’t move fast enough to fix the bank’s problems.
Barr is expected to formally introduce his proposals to policymakers later this year, but they are likely to face opposition.
Tim Adams, the CEO of the Institute of International Finance, said that “constraining the financial sector’s capacity to support growth and economic activity – especially at this moment — is puzzling and counterproductive.”
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