In a decisive move to secure the nation’s financial system following the recent failures of multiple regional banks, a top US bank watchdog has unveiled more rigorous capital rules that will apply to a wider spectrum of lenders. This announcement comes as a concerted effort to restore stability and ensure the resilience of the banking sector.
The new capital rules, announced on Monday, mark a significant step in reinforcing the safeguards of the US banking industry. The failures of several regional banks earlier this year served as a wake-up call, exposing vulnerabilities, and prompting regulatory authorities to take proactive measures.
Michael Barr, Federal Reserve Vice Chair of Supervision, provided a glimpse into forthcoming robust capital requirements aimed at banks holding assets exceeding $100 billion.
Barr emphasized that these proposed adjustments are crucial for enhancing the industry’s resilience, particularly in the wake of the failures experienced by various mid-sized lenders earlier this year.
According to Barr, the Federal Reserve’s proposed modifications would primarily result in increased capital requirements for the largest and most intricate banks. Major financial institutions might be required to maintain an extra 2 percentage points of capital, equivalent to an additional $2 of capital for every $100 of risk-weighted assets.
Significantly, the proposed regulations would additionally mandate that banks holding assets exceeding $100 billion disclose the impact of losses on their capital levels. This requirement aims to enhance the transparency of regulatory capital ratios by providing a more accurate representation of banks’ ability to absorb losses.
Previously exempt from this rule due to its size, SVB faced a situation where it incurred unexpected losses upon selling assets, resulting in concerns among investors and depositors.
Speaking at an event held by the Bipartisan Policy Center in Washington DC, Barr emphasized that the extensive range of suggestions presented would notably fortify the financial system and equip it to confront unforeseen and emerging risks, akin to the ones that surfaced in the banking sector earlier this year.
“Our recent experience shows that even banks of this size can cause stress that spreads to other institutions and threatens financial stability,” Barr said in a 16-page speech released Monday.
“The risk of contagion implies that we need a greater degree of resilience for these firms than we previously thought.”
The proposals come months after three of the four largest failures of federally insured banks in US history—Silicon Valley Bank, Signature Bank, and First Republic—sparked fears about the resilience of regional lenders. All three failed banks had more than $100 billion in assets but were below the current $250 billion threshold for more stringent requirements.
“The failures of SVB and other banks this spring were a warning that banks need to be more resilient and need more of what is the foundation of that resilience, which is capital,” Barr said.
Among the other changes, Barr proposed a more “transparent and consistent” approach to assessing banks’ individual credit and market risks, ending the practice of institutions putting forward their own assessments, which he said often “underestimate” potential problems.
Furthermore, the proposed regulations would bring about modifications to how banks evaluate market risk, encompassing potential losses stemming from fluctuations in interest rates, stock prices, foreign exchange, and commodity prices.
In addition, banks would be obligated to analyze risk at the granularity of individual trading desks, specific to particular asset classes, rather than solely at the firm level. This adjustment would contribute to an increase in the capital allocated for safeguarding against market risks.
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