Fed Vice Chairman of Supervisory Michael S. It’s the money you need to get through a difficult situation.
The overhaul will require large banks to increase their capital, the holdings of cash and other readily available assets that can be used to absorb losses in times of crisis. Barr said the adjustment would be “equivalent to requiring large banks to hold an additional 2 percentage points of capital.”
“The beauty of capital is that it doesn’t care what causes losses,” Barr said in a preview speech of the proposed changes. “No matter what the vulnerability or shock, capital can absorb the resulting losses.”
Mr. Barr’s proposal did not end in agreement. It must go through a notice and comment period that gives banks, legislators and other stakeholders an opportunity to express their views. If the Fed Board votes to implement them, their implementation will take transition time. But the series of sweeping changes he has launched will meaningfully align both how banks monitor their own risks and how government regulators supervise them.
“It’s definitely meaty,” said Ian Katz, a bank regulation analyst at Capital Alpha.
The Fed’s vice chairman for oversight, appointed by President Biden, has spent months reviewing the capital requirements of America’s biggest banks, and the results have been highly anticipated. For months, bank lobbyists have warned of changes he might propose. Mid-sized banks, in particular, have been outspoken in arguing that tighter regulatory requirements would be costly to banks and constrain their ability to lend.
Monday’s speech revealed why banks are worried. In a speech at the Bipartisan Policy Center in Washington, Mr. Barr said he wanted to update capital requirements based on bank risk “to better reflect credit, trading and operational risks.”
For example, banks will no longer be able to estimate certain types of credit risk, the likelihood of loan losses, or rely on internal models for particularly unpredictable market risks. In addition, banks will be required to model individual trading desk risks for specific asset classes rather than firm level.
“These changes will raise market risk capital requirements.” By fixing the gaps in the current rules,” Barr said.
Perhaps anticipating further backlash from banks, Mr. Barr also listed existing rules that he wouldn’t tighten, including special capital requirements that apply only to very large banks.
The new proposal also seeks to address vulnerabilities exposed when a string of big bank failures began earlier this year.
One of the factors that led to the failure of Silicon Valley Bank and shocked the middle-market banking industry was that the bank had piles of unrealized losses on securities classified as “available-for-sale.”
Lenders didn’t have to count these paper losses when calculating how much capital they needed to get through the tough times. And when he had to sell securities to raise cash, the losses came back and hurt.
Barr’s proposed adjustments would require banks with more than $100 billion in assets to account for unrealized losses and gains on such securities when calculating their regulatory capital, he said.
The change will also increase scrutiny of the broader large banking group. Barr said the stricter rules would apply to companies with more than $100 billion in assets, lowering the standard for stricter supervision and now limiting to internationally active banks or banks with more than $700 billion in assets. He said he was applying the strictest rules. About 30 of the country’s estimated 4,100 banks have assets worth more than $100 billion.
Katz said the extension of the tougher rules to a wider range of banks was the most notable part of the proposal, and while such adjustments were expected based on recent statements by other Fed officials, they were “not significant.” It’s a change,” he said.
Bank bombings earlier this year showed that even much smaller banks can wreak havoc when they fail.
Still, Dennis Kelleher, chief executive of the nonprofit Better Markets, said, “We won’t know how significant these changes will be until a lengthy rule-making process unfolds over the next few years.” rice field.
Kelleher added that while Barr’s idea generally sounds good, it suffers from a lack of urgency among regulators.
“When it comes to bailouts of banks, banks act quickly and decisively, but adequate regulation to prevent bankruptcy is slow and takes years.”
Bank lobbyists criticized Barr’s announcement.
Kevin Frommer, chief executive of the lobby group Financial Services Forum, said: “Without providing any evidence as to why, Fed Deputy Chairman Barr said the US’s biggest banks needed more capital. It seems that they believe that they are,” he said in a statement. Monday news media.
“More capital demand for the big U.S. banks will lead to higher borrowing costs and less lending to consumers and businesses, slowing the economy and having the biggest impact on margins,” Frommer said.
Susan Wachter, a professor of finance at the Wharton School of the University of Pennsylvania, said the proposed changes were “long overdue.” She said she was relieved to learn that plans to make them were underway.
The Fed’s Vice Chairman suggested further banking supervision adjustments inspired by the March 2023 turmoil are still on the horizon.
“We will pursue further regulatory and supervisory changes in the face of recent stress in the banking industry,” Barr said in his speech. “I hope to have more say on these topics in the coming months.”