Federal Reserve Vice Chairman for Supervision Michael S. Barr announced on Monday that he would push for significant changes to the way America’s biggest banks are supervised to make them more resilient in times of trouble – partly by increasing how much capital they would need to get them through tough times.
The overhaul will require the biggest banks to shore up their capital – cash and other readily available assets that can be used to absorb losses in times of trouble. Mr Barr predicted that if his changes were implemented, it would be “equivalent to requiring the largest banks to hold an additional two per cent of capital.”
In his speech previewing the proposed changes, Mr. Barr said, “The beauty of capital is that it doesn’t care about the source of the loss.” “Whatever the vulnerability or shock, capital is able to help absorb the resulting loss.”
Mr Barr’s proposals are not a done deal: He will need to make it through a notice-and-comment period – which will give banks, lawmakers and other interested parties a chance to express their views. If the Fed board votes to install them, the changes will take time. But among the sweeping changes he made, there was a meaningful shift in how banks monitor their own risks and are monitored by government regulators.
“It’s definitely meaty,” said Ian Katz, an analyst at Capital Alpha who covers banking regulation.
The Fed’s vice chair for supervision, who was nominated by President Biden, has spent months reviewing capital rules for America’s largest banks, and their results are highly anticipated: bank lobbyists for months warning about the changes he might propose. Mid-sized banks, in particular, have been vocal in saying that any increase in regulatory requirements would be costly to them, which would constrain their ability to lend.
Monday’s speech made clear why banks are worried. In remarks delivered at the Bipartisan Policy Center in Washington, he said Mr Barr wants to update bank risk-based capital requirements to “better reflect credit, business and operational risk”.
For example, banks will no longer be able to rely on internal models to estimate certain types of credit risk – the potential for losses on loans – or particularly difficult market risks. In addition, banks will be required to model risk for individual trading desks for particular asset classes rather than at the firm level.
“These changes will increase the risk capital requirements of the market By fixing loopholes in the existing rules,” Mr Barr said.
Perhaps anticipating more bank retaliation, Mr Barr also listed existing rules he did not plan to tighten, including special capital requirements that apply only to the largest banks.
The new proposal will also attempt to address the vulnerabilities that came to the fore earlier this year when several major banks collapsed.
One factor that led to the collapse of the Silicon Valley bank—and sent shock waves through the medium-sized banking sector—was that the bank was sitting on a pile of unrealized losses on securities classified as “available for sale.”
The lender did not need to count those paper losses when calculating how much capital it needed to weather the difficult period. And when it had to sell securities to raise cash, the losses resumed.
Barr’s proposed adjustment, he said, would require banks with $100 billion or more in assets to account for unrealized losses and gains on such securities when calculating their regulatory capital.
These changes will also tighten supervision for a wider group of large banks. Mr Barr said his more stringent rules would apply to companies with $100 billion or more in assets – lowering the threshold for tighter supervision, which now applies the most advanced rules to banks that are active internationally or have Has $ 700 billion or more in assets. Of the country’s estimated 4,100 banks, about 30 have assets of $100 billion or more.
Mr Katz said the extension of tighter rules to a wider group of banks was the most notable part of the proposal: such a change had been expected recently based on comments from other Fed officials, but “it’s quite a change. “
Bank failures this year made it clear that the collapse of even very small banks can lead to chaos.
Still, Dennis Kelleher, chief executive of the nonprofit Better Markets, said, “We won’t know exactly how significant these changes are until the long rule-making process begins over the next few years.”
Mr. Kelleher said that in general Mr. Barr’s ideas sound good, but he said he was troubled by the lack of urgency among regulators.
He said, “When it comes to bailing out banks, they act quickly and decisively, but when it comes to adequate regulation to prevent banks from crashing, they are slow and this includes It takes years.”
Bank lobbyists criticized Mr. Barr’s announcement.
Kevin Frommer, chief executive of the lobby group Financial Services Forum, said in a statement: “The Fed’s vice chairman for supervision, Barr, believes the largest US banks need even more capital, without providing any evidence.” ” news media on Monday.
“Additional capital requirements on the largest US banks will increase borrowing costs and reduce credit to consumers and businesses – slowing our economy and having the biggest impact on margins,” Mr Frommer said.
Susan Wachter, a finance professor at the Wharton School of the University of Pennsylvania, said the proposed changes were “long overdue”. He said that it was a relief to know that the plan to make them is underway.
The Fed vice chairman hinted that additional bank oversight changes inspired by the March turmoil are coming.
“I will make further changes to regulation and supervision in response to recent banking stress,” Mr Barr said in his speech. “I look forward to having much more to say on these topics in the coming months.”
