Federal Reserve Vice Chair, Barr, has proposed raising bank capital requirements and adopting a standardized approach to assess risk in an effort to strengthen regulation for major U.S. banks. This proposal comes as the biggest regulatory shakeup since the 2008 financial crisis and follows the collapse of several banks, including Silicon Valley Bank, earlier this year.
Barr stated that he hopes Wall Street banks will start using standardized methods to estimate credit, operating, and transaction risks, rather than relying on their own estimates. He also called for the Fed’s annual stress tests to be improved in order to better capture potential risks faced by companies. While industry giants have opposed higher capital requirements in the past, Barr’s review found the current system to be robust and in need of changes that would lead banks to set aside more money in reserve to protect against losses.
In an effort to increase transparency and consistency, Barr’s proposed rules would eliminate reliance on banks’ individual risk estimates. The largest banks would also be required to hold two additional percentages of capital for every $100 of risk-weighted assets. TD Cowen analyst Jaret Seiberg notes that these changes would result in a modest increase in capital requirements.
However, Barr emphasized that the proposed changes would only take effect if they were proposed and approved by the Federal Reserve, FDIC, and the Office of the Comptroller of the Currency. While initial plans may be released later this month, the actual implementation of the changes could take months or even years. The industry will also have the opportunity to provide input on the proposed regulations.
Currently, “enhanced capital rules” apply to banks and bank holding companies with assets exceeding $700 billion. Barr suggests that this threshold should apply to those with assets exceeding $100 billion. He argues that setting aside more capital is about building resilience in the financial system and allowing banks to lend to the economy.
Following the news of the proposed changes, large U.S. bank stocks had a mixed performance. JPMorgan Chase, Morgan Stanley, Goldman Sachs, and Bank of America experienced slight increases, while Citigroup and Wells Fargo saw slight decreases.
Overall, Barr’s proposal for stronger regulation and higher capital requirements has sparked a debate within the banking industry. It remains to be seen how the proposed changes will be received and whether they will be successfully implemented in the future.