Following previous bank failures, the top regulator of the Federal Reserve unveiled a comprehensive plan to raise capital standards for the biggest banks in the country. The sector quickly criticized the proposal.
In a much-awaited speech, Michael Barr, Fed Vice Chairman for Supervision claimed he intended to pursue several regulatory initiatives which would instruct larger banks with over $100 billion in assets to keep more in reserve, arguing that the lately bank failures highlighted the necessity for authorities to strengthen system resilience.
Since President Joe Biden appointed Barr to be the Fed's bank watchdog, it was anticipated that he would impose stricter regulations on the industry. The business was concerned that he would push for a broad set of stricter regulations while simultaneously ignoring their cries for relief in particular areas. However, Monday's statements represented the most thorough look of his plan to date.
The banking sector criticized the move as stupid and lending-impairing.
Rob Nichols, president and chief executive officer of the American Bankers Association, stated that the reforms Barr proposed today do not sufficiently take into account the adverse effects of requiring banks of all sizes to retain more capital than is necessary to preserve safety and soundness. Higher requirements for capital cost the economy money and that regulators already have other regulatory tools at their disposal to control risks.
The nation's biggest bank lobby declared that it would reject any measures it regarded pointless and detrimental to the economy.
Barr stated that instead of overhauling the US bank capital framework, he intended to strengthen it in a number of ways, such as by fully implementing the Basel bank capital accord that was reached on a global scale and by increasing the frequency of yearly "stress tests" of banks' health. The endeavor is anticipated to begin in the upcoming weeks, however he did not provide a particular start date for any modifications.
In his address, Barr provided an in-depth review on the "holistic" examination of bank capital regulations that he had begun soon after taking a position at the US central bank in 2022. He had previously said that he was exploring where regulations might be improved, but he now claims that the financial crisis of March and April, that saw Silicon Valley Bank and two other institutions fail, underlined the importance to take additional action.
The changes proposed here, he said, address deficiencies in capital requirements that didn't start in March of 2023. The comprehensive study, he added, began well before then. However, it is clear that this spring's bank failures, including those of SVB and other institutions, served as a reminder that banks needed to become more resilient.
In particular, Barr claimed that the crisis demonstrated the systemic importance of smaller banks, demonstrating the need for tighter regulation of them. In order to increase the number of businesses that must abide by the laws, he declared he would try to apply stricter capital requirements to banks with assets above $100 billion.
According to data from the Fed, these banks would be eligible: Citizens Financial Group, Fifth Third, Huntington, and Regions. Requests for response from the banks were not immediately answered. At least 0.3% of the share prices of the first three companies fell during Monday's lunchtime trading, while Regions' price increased by 0.3%.
Barr also stated he had no plans to lower the current levy on major international banks or the leverage regulations, which the sector claimed hindered the operation of the Treasury market, dashed industry expectations for any rule relief. According to Barr, the research is "inconclusive" and any effects should be lessened if a more comprehensive set of regulations is in place.
Barr did stress, however, that any new regulations would have to go through a thorough rule-writing and public feedback process and include protracted periods of transition to enable banks to raise adequate capital.
The majority of banks, according to him, already have sufficient capital to fulfill the new requirements he has in mind, but companies that still need to raise capital will be capable to do so in less time than it would take them to generate two years' worth of retained income, while keeping their investor payouts.
For its regulation of the banks implicated in this year's banking crisis, the Fed has faced criticism on its own account. On Monday, the Republican-led Oversight Committee of the US House of Representatives demanded that Fed Chair Jerome Powell turn over private records pertaining to the US central bank's oversight of the defunct Silicon Valley Bank.
On Monday, Barr said that although they still have a bit of work to do, the Fed is getting close to setting interest rates at a level that will allow it to restore inflation to the target of 2%.