Top US bank watchdog outlines tougher rules for larger lenders

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A top US banking regulator has announced tougher capital rules for a broader range of lenders in a bid to shore up a financial system rattled by the failure of several regional banks earlier this year.

Michael Barr, vice-chair for supervision at the Federal Reserve, on Monday unveiled regulatory changes for institutions with $100bn or more in assets, proposing harsher capital standards that will require banks to stow away additional capital that can be used to absorb any losses.

“The comprehensive set of proposals that I have described here today would significantly strengthen our financial system and prepare it for emerging and unanticipated risks, such as those that manifested themselves in the banking system earlier this year,” he said at an event hosted by the Bipartisan Policy Center 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 — sparked fears about the resilience of regional lenders. All three failed banks had more than $100bn in assets but were below the current $250bn threshold for more stringent requirements.

Crucially, the new rules would also require the midsized banks to report the effect of losses on their assets on their capital levels, which, Barr said “improve the transparency of regulatory capital ratios, since it would better reflect banking organisations’ actual loss-absorbing capacity”. SVB had been exempt from that rule due to its size and the sudden losses that it took when it sold assets spooked investors and depositors.

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

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

Most jurisdictions that have already implemented the Basel reforms applied the rules to all of their banks. However, the US, with its more fragmented banking system and more than 4,000 banks, is an outlier and has taken a size-based tiers approach.

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

Barr said that the proposed rules would require banks to hold an extra $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 those that did not make enough in profits could within two years be compliant, while still paying out dividends.

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

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

In a moderated discussion that followed his remarks, Barr countered the criticism. “Capital is about building resilience in the financial system. Capital is what enables banks to lend to the economy.”

Among the other changes, Barr proposed a more “transparent and consistent” approach to assessing banks’ individual credit and market risks, ending the practice of institutions putting forward their own individual assessments, which he said often “underestimate” potential problems. He also proposed broadening the scope of the Fed’s annual stress tests to evaluate a wider range of risks.

Barr also said he planned changes around a capital surcharge currently applied to the so-called global systemically important banks (G-Sibs).

Specifically, Barr said he would tailor rules to reduce the incentives for banks to temporarily alter a balance sheet to obtain a lower G-Sib surcharge, as well as reduce the increments at which additional capital is required to lessen “cliff effects”.

Barr opted against making any adjustments to how banks calculate their so-called supplementary leverage ratios, which requires large banks to have capital equal to at least 3 per cent of their assets, or 5 per cent for the largest systemically important institutions. He rejected lobbying from lenders who wanted Treasuries and cash reserves exempted and cited liquidity concerns in US government bond markets.