The Fed’s banking police are calling for tougher capital rules, sparking clashes with lenders

“The events of this year reinforce the need for strong capital in the system,” he said in response to a question at the event. “Many people thought of systemic risk as only about the global systemically important banks and not about other institutions that were large and could cause problems. I think it was a mistake.”

Barr’s speech is poised to trigger intense lobbying by the biggest banks and congressional oversight of the Fed, which is expected to propose capital requirements in line with his recommendations as soon as in the coming weeks. Top Republicans — echoing criticism raised by the banking industry — signaled they would fight the effort.

In the proposed revision, Barr calls for changes to strengthen existing rules for extended capital and to apply them to more banks, during a phase-in period. He said any changes would not be fully effective for “a few years,”[ads1]; as the Fed takes public comments and offers a transition timeline.

Calling for an end to the practice of relying on banks’ own individual estimates of lending risk, Barr warned that the firms’ internal models “suffer from several shortcomings”. He also recommended adjusting how banks measure financial market risk, including by requiring them to model potential hazards at the level of individual trading desks for specific assets, rather than at the firm level.

Barr recommends that the new risk-based capital rules apply to banks with $100 billion or more in assets – and capture more than the current regulatory regime that applies to firms that have at least $700 billion in assets or are internationally active.

He also calls for long-term debt requirements – another type of buffer large banks must have – to apply to all banks with $100 billion or more in assets, a larger group than the few largest global systemically important financial institutions that must comply. rules today. He described it as an important safeguard for a class of banks that came under pressure after the SVB failure.

In another move by SVB, Barr is proposing changes to how banks with more than $100 billion in assets account for unrealized losses in securities they hold — a key concern in the California-based lender’s collapse.

“The comprehensive review of course began well before then, and the steps proposed here address deficiencies in capital standards that did not start in March 2023,” he said. “But in an obvious way, the failures of SVB and other banks this spring were a warning that the banks must be more robust, and need more of what is the basis of that resilience, which is capital.”

In addition, Barr recommends that the Fed review how it implements bank stress tests and adjust an addition that applies to global systemically important banks. Barr is not proposing changes to another bank safeguard known as the enhanced supplemental leverage ratio.

Barr said most banks already have enough capital to meet the proposed requirements. The Fed estimates that banks that need to build capital to meet the mandates will be able to do so in less than two years, even while maintaining their dividends. He said the changes he is recommending, which must be formally proposed by the Fed and open to public feedback, would be equivalent to requiring the biggest banks to hold an additional $2 in capital for every $100 of their risk-weighted assets.

Republican lawmakers and groups representing big banks wasted no time pushing back on Barr’s recommendations.

House Financial Services Chair Patrick McHenry (RN.C.), who heads the GOP’s oversight of the Fed, said Barr’s plan “has not yet received adequate scrutiny of the full [Federal Reserve] The Board, Congress, or the American people.”

“Vice Chairman Barr continues to capitalize on recent bank failures as justification for these changes, despite the failures occurring in a small subset of institutions,” McHenry said in a statement. “This is deeply troubling as these changes could have catastrophic consequences for the cost and availability of credit for all American families and workers.”

Tim Adams, who represents major financial firms as CEO of the Institute of International Finance, said that while the economy is still dealing with shocks and a potential slowdown, “limiting the financial sector’s capacity to support growth and economic activity – especially at this moment – is confusing and counterproductive.” .”

But Barr downplayed warnings that tougher rules could force banks to curtail funding and hurt the economy.

“While this increase in claims may lead to some changes in banking activities, the benefits of making the financial system more resilient to stresses that might otherwise dampen growth are greater,” Barr said.

The plan drew praise from the Independent Community Bankers of America, which praised Barr for sparing small lenders. Senate Banking Chair Sherrod Brown (D-Ohio), who for years has warned about financial risks from the biggest banks, also applauded the recommendations.

“The framework laid out by Deputy Barr will strengthen our banking system, help our economy grow, support communities and ensure that working families and small businesses’ money is safe,” Brown said.

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