Banks with at least $100 billion in assets could face higher capital limits

By Elisabeth Buchwald, CNN

New York (CNN) — Federal Reserve Vice Chair for Supervision Michael Barr said Monday he is proposing stricter bank capital requirements in light of three major US bank failures earlier this year.

Banks with at least $100 billion in assets would be subject to similar regulation that banks with $700 billion in assets currently face, under Barr’s proposal. These regulations would force banks to hold an additional two percentage points of capital, or an additional $2 of capital for every $100 of risk-weighted assets, Barr said.

“Our recent experience shows that even banks [with at least $100 billion in assets] can cause stress that spreads to other institutions and threatens financial stability,” Barr in remarks at the Bipartisan Policy Center. “The risk of contagion implies that we need a greater degree of resilience for these firms than we previously thought.”

Barr is also proposing that banks with at least $100 billion in assets “account for unrealized losses and gains in their available-for-sale securities when calculating their regulatory capital.”

Silicon Valley Bank, among other banks, was criticized for not having to account for unrealized losses it accumulated, particularly with long-term Treasury notes, when calculating its capital level. This meant that it didn’t have enough assets to back its liabilities when it experienced a bank run because the value of its assets had fallen drastically.

Requiring banks to hold more capital could help mitigate risks that arise when banks are under stress. But the downside is that it limits banks’ ability to achieve higher profits since it would mean they cannot make as many loans to consumers and businesses.

“Some industry representatives claim that inadequate capital had nothing to do with those bank failures,” Barr said Monday. “I disagree. It was an unsuccessful attempt by SVB to raise capital that caused uninsured depositors to look more closely at how the bank was capitalized.”

Kevin Fromer, president and CEO of the Financial Services Forum, an industry group representing CEOs of some of the nation’s largest banks, expressed concerns about Barr’s proposals.

“Capital isn’t free,” he said in a statement on Monday. “Further capital requirements on the largest US banks will lead to higher borrowing costs and fewer loans for consumers and businesses — slowing our economy and impacting those on the margin hardest.”

Meanwhile Dennis Kelleher, CEO of Wall Street reform group Better Markets, applauded the proposals, saying they “promote bank stability, lending, and economic growth, not constrain it.”

“When large banks have too little capital, Main Street families, small businesses, community banks and the entire economy pay the price,” he said in a statement shared with CNN.

Further details on new banking regulation are expected to be formally unveiled later this summer. It could take years before any changes to go into effect, since they would have to go through the standard notice-and-comment rulemaking process, as with any new banking regulation.

Barr on Fed’s fight against inflation

In addition to discussing bank regulation, Barr also spoke about the Fed’s plans to get inflation down.

The actions the Fed has taken since it began raising interest rates in March 2022, and the recent pause, are all “part of positioning ourselves so that we can try and get to [the Fed’s target of 2% inflation] a careful way,” Barr said.

“We’re close — but we still have a bit of work to do,” he added.

The central bank is widely expected to resume hiking interest rates at its upcoming meeting later this month.

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