- Regulators want to increase U.S. bank capital requirements by as much as 20% in an effort to strengthen the banking system after a string of failures this year, according to The Wall Street Journal, which cited unnamed sources familiar with the matter.
- Bank regulators are expected to announce the proposal as early as this month, the sources said.
- The exact proportion by which capital requirements could jump will depend on a bank’s lines of business, with the largest increases expected to fall on lenders with big trading operations, and those who rely heavily on fee income, the Journal reported.
Federal Reserve Vice Chair for Supervision Michael Barr said in December that the central bank was considering tightening bank capital requirements and revamping annual stress tests.
Speaking virtually to the American Enterprise Institute, Barr emphasized that regulators — and bank managers — should be “humble” with regard to the ability to predict future downturns.
Barr reiterated his call for tighter capital rules during a House hearing in May.
“[W]e need to evaluate whether our capital requirements appropriately measure the ability of banks to absorb losses,” he said. “Had [Silicon Valley Bank] been required to reflect declines in the face value of available-for-sale securities in its capital, it may have held more capital to cover these losses.”
Monday’s report comes as regulators, even before the collapse of SVB, Signature, and First Republic Bank, have indicated tougher capital requirements were forthcoming for the largest banks. The changes would raise overall capital requirements by 20% at larger banks on average, the Journal reported.
The heightened capital requirements that regulators are considering would apply to institutions with at least $100 billion in assets, a significant drop from the existing $250 billion threshold, according to the Journal.
The Federal Reserve is taking the lead in crafting the proposal, along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, the Journal reported. Each agency is expected to seek comment on the proposal, the paper reported.
Bank trade groups criticized the reported plan.
“Higher capital requirements are unwarranted,” Financial Services Forum CEO Kevin Fromer told the Journal. “Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time.”
The new rules would treat fee-based activities as an operational risk, according to the Journal.
That would “disproportionately and inappropriately” increase capital requirements for firms focused on fee-generating activities, Katie Collard, senior vice president and associate general counsel at the Bank Policy Institute, told the Journal.
Meanwhile, the nation’s largest banks have been bracing for such tightening.
JPMorgan Chase CFO Jeremy Barnum said last month the bank was expecting the proposals on implementing new Basel standards “any day now,” according to Bloomberg. Barnum said that while the bank would push back on calls for more capital, it was preparing for the increase, the wire service reported.
Citi CEO Jane Fraser said her bank was putting anything beyond modest buybacks on hold until more clarity on the Basel changes and the Federal Reserve’s separate “holistic” review of capital requirements emerged, according to Bloomberg.