Fed’s Barr proposes expanding capital requirements to include more banks

Federal Reserve Vice Chairman for Supervision Michael Barr said today that regulators will propose strengthening capital requirements for banks with more than $100 billion in assets, including creating a new long-term debt requirement. During a speech at the Bipartisan Policy Center in Washington, D.C., Barr said his review of capital standards began before the recent bank failures, but those events expanded the range of banks they ultimately proposed should be subject to the heightened standards.

An “important aspect” of the proposals will be to implement the changes to the risk-based capital requirements, referred to as the Basel III endgame, Barr said. The proposed rules would end the practice of relying on banks’ estimates of their own risk and instead use “a more transparent and consistent approach.” They would also adjust the way that a firm measures market risk concerning its trading activities, and—for operational losses—replace an internal modeled operational risk requirement with a standardized measure. In Barr’s view, including banks and bank holding companies with more than $100 billion in assets is appropriate, given the proposed rules will be less burdensome to implement compared to current requirements “since they don’t require a bank to develop a suite of internal credit risk and operational risk models to calculate regulatory capital,” he said.

A related proposal would introduce a long-term debt requirement for all banks above $100 billion, Barr said. “Long-term debt improves the ability of a bank to be resolved upon failure because the long-term debt can be converted to equity and used to absorb losses. Such a measure would reduce losses borne by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, and provide the FDIC with additional options for restructuring, selling or winding down a failed bank,” he added.

Barr also reviewed the Fed’s stress test framework and concluded that while it was generally sound, “we should review our global market shock and the stress test’s approach to estimating operational risk so that they provide a complementary lens to our risk-based standards on market risk and operational risk, respectively.” More than a decade of stress testing and “real-life surprises” such as the pandemic made it clear that stress tests must be stressful to adequately prepare banks for unanticipated events, he said. The vice chairman also noted that the agency plans to open the proposals to public comment in the near future.

ABA raises concerns about economic costs

Barr’s decision to push forward new bank capital requirements is disappointing, especially given that regulators have previously pointed to strong evidence that the U.S. banking system is already well capitalized, American Bankers Association President and CEO Rob Nichols said in response to the vice chairman’s remarks. “The changes he outlined today fail to adequately consider the negative repercussions from forcing banks of all sizes to hold more capital than is needed to maintain safety and soundness,” Nichols said. “Higher capital requirements come at a cost to the economy, and regulators have other existing regulatory tools to manage risks including those that led to the recent bank failures.”

The proposed Basel III capital requirements would only make it harder for banks of all sizes to meet the needs of their customers, clients and communities, Nichols added. “Policymakers, who consistently cite the breadth and depth of our banking system as a source of strength, have not yet shown that these reforms will preserve that unique banking diversity or outweigh the significant costs to the U.S. economy,” he said.

The association’s concerns about the proposal were also expressed during a Bipartisan Policy Center forum on the proposed changes held after Barr’s presentation. ABA SVP Hugh Carney—one of the panelists—said that he has yet to hear a convincing justification for adopting the Basel III endgame. “This was a process that started over a decade ago and was focused on credit, operational and market risk,” Carney said. “It has nothing to do with Silicon Valley Bank … the key attributes there were interest rate risk and liquidity risk, and [Barr’s proposal] really seems like it’s recommending knee surgery for wrist injuries—it’s just not really on point.”