November 30, 2023

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The top US banking watchdog sets stricter rules for large lenders

The top US banking watchdog sets stricter rules for large lenders

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A major US banking regulator has announced tougher capital rules for a broader group of lenders in a bid to prop up a financial system that was rocked by the failure of several regional banks earlier this year.

Michael Barr, vice president of supervision at the Federal Reserve, on Monday unveiled regulatory changes for institutions with assets of $100 billion or more, proposing tougher capital standards that would require banks to stockpile additional capital that could be used to absorb any losses.

He said at an event hosted by the Center for Bipartisan Politics in Washington, DC.

The proposals come months after three of the four largest failures of federally insured banks in US history — Silicon Valley Bank, Signature Bank and First Republic — raised concerns about the resilience of regional lenders. All three failed banks had more than $100 billion in assets but were below the current $250 billion threshold for stricter requirements.

Crucially, the new rules will also require medium-sized banks to report the impact of losses on their assets on their capital levels, which Barr said will “improve the transparency of regulatory capital ratios, as they will better reflect banking institutions’ actual loss absorption capacity.” The SVB was exempt from this rule due to its size and the sudden losses it incurred when it sold assets, to the dismay of investors and depositors.

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Barr said the changes would increase capital requirements across the US banking industry, but would “essentially raise capital requirements for the largest and most complex banks.”

The proposed new banking rules will come in two forms: the final implementation of the new international standards — the so-called final Basel III reforms — and the sweeping revision of capital rules that Barr announced last year.

Most jurisdictions that have already implemented the Basel reforms have applied the rules to all of their banks. However, the United States, with its more fragmented banking system and more than 4,000 banks, is an anomaly and has taken a tiered approach based on volume.

Bank stocks were little changed on Monday, reflecting that many of the proposals were expected and would be phased in over time.

Barr said the proposed rules would require banks to hold an additional $2 of capital for every $100 of risk-weighted assets. He argued that most banks already had enough capital to meet these new rules and estimated that banks that did not make enough profits could comply within two years, while still paying dividends.

In response to Barr’s letter, the Financial Services Forum, a lobby group for the largest banks including JPMorgan Chase, Bank of America and Goldman Sachs, said more capital requirements would lead to higher borrowing costs and fewer loans for consumers and businesses. “We call on regulators to consider these implications carefully,” said FSF CEO Kevin Frommer.

Greg Baer, ​​president of the Bank Policy Institute, a lobbying group, said Barr’s proposals failed to consider “the costs of economic growth, the availability of credit, market liquidity, or the economy as a whole.”

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In a moderate debate that followed his remarks, Barr responded to the criticism. “Capital is building resilience in the financial system. Capital is what enables banks to lend to the economy.”

Among other changes, Barr proposed a more “transparent and consistent” approach to assessing banks’ individual credit and market risk, and ending the practice of institutions submitting their own individual ratings, which he said often “underestimate” potential problems. He also proposed expanding the Fed’s annual stress tests to assess a broader range of risks.

Barr also said he plans to make changes related to the extra capital fee currently applied to so-called Global System Important Banks (G-Sibs).

Specifically, Barr said he would design the rules to reduce incentives for banks to temporarily shift the balance sheet for lower G-Sib surcharges, as well as reduce increases that require additional capital to reduce “slope effects.”

Barr chose not to make any adjustments to how banks calculate so-called supplementary leverage ratios, which require large banks to have capital equal to at least 3 percent of their assets, or 5 percent for the largest systemically important institutions. He rejected pressure from lenders who want to relieve Treasury bonds and cash reserves and cited liquidity concerns in US government bond markets.