Gruenberg: Bank failures guiding scope of proposed Basel capital requirements

The recent bank failures show that banks with more than $100 billion in assets can pose genuine financial stability risks, and federal regulators will take that into account as they craft new capital requirements, FDIC Chairman Martin Gruenberg said today. Speaking at an economic conference in Washington, D.C., Gruenberg said regulators will “shortly” propose rulemaking on a new framework finalizing the Basel III capital standards. Community banks, which are subject to different capital requirements, would not be affected, but regulators are still considering whether to apply the proposal to banks with more than $100 billion in assets.

The recent failures—all of banks between $100 billion and $250 billion in size—and the resulting economic shocks erase any doubt that the failure of banks in that size category can have financial stability consequences, Gruenberg said. “The lesson to take away is that banks in this size category can pose genuine financial stability risks and the federal banking agencies need to review carefully the supervision of these institutions, particularly for interest rate risk in the current environment, and the prudential requirements that apply to them, including capital, liquidity and loss-absorbing resources for resolution.”

Gruenberg also disputed criticism that an increase in capital requirements would be a drag on bank lending and the U.S. economy. A finalized rule likely wouldn’t take effect until the middle of next year and would be phased in over several years, he said. Also, stronger capital improves the resilience of the largest banks and enhances their ability to lend through the economic cycle, he added. “

History has proven that insufficient capital can lead to harmful economic results when banks are unable to provide financial services to households and businesses, as occurred during the 2008 financial crisis,” Gruenberg said. “Ensuring adequate amounts of bank capital provides a long-term benefit to the economy by enabling banks to play a counter-cyclical role during an economic downturn rather than a pro-cyclical one.”

ABA: Higher capital standards pose risk to consumers, businesses

While asking banks of any size to hold even more capital will come at a cost to the economy, broadening the scope of complex capital standards designed for internationally active banks to smaller institutions will make it particularly difficult for midsize and regional banks to provide credit to consumers and businesses during times of economic stress, American Bankers Association President and CEO Rob Nichols said in response to Gruenberg’s remarks.

Nichols noted that U.S. banks are already well-capitalized—a fact reiterated by Gruenberg and other top financial sector regulators in recent days. “We have long believed that regulation should be tailored to a bank’s risk and business model,” Nichols said. “Arbitrary asset thresholds and changes not justified by rigorous data and evidence are a mistake that will only make it harder for banks of all sizes to meet the needs of their customers, clients and communities while driving financial activity to less-regulated nonbanks.

“The stakes are too high for consumers and businesses to simply rely on regulators’ assurances about the future,” Nichols added. “Policymakers will need to demonstrate that the benefits outweigh the significant costs to the economy.”