Vice Chairman of the Federal Reserve Board of Supervisory Proposes Big Bank Regulation Changes

Michael S. Barr, the Federal Reserve’s vice chairman for supervision, announced Monday that he will push for significant changes in how major US banks are supervised in an effort to make them more resilient in times of turmoil — in part by escalating how much they charge. Capital they have to go through a rough patch.

A comprehensive overhaul will require the largest banks to increase their holdings of capital — readily available cash and other assets that can be used to absorb losses in times of turmoil. Mr Barr predicted his amendments would be “the equivalent of requiring the big banks to hold an additional two percentage points of capital”, if they were implemented.

“The beauty of capital is that it doesn’t care where the loss comes from,” said Mr. Barr in his speech, outlining the proposed changes. “Whatever the vulnerabilities or shock, capital is able to help absorb the resulting loss.”

Mr. Barr’s proposals are not a done deal: They’ll need to make it through the notice and comment period — giving banks, lawmakers and other interested parties a chance to air their views. If the Federal Reserve votes to establish them, their implementation will include transition time. But the sweeping set of changes he put in place is a meaningful overhaul of how banks monitor their own risks and oversight by government regulators.

“It’s definitely meaty,” said Ian Katz, an analyst at Capital Alpha in charge of banking regulation.

The Fed’s vice chairman of oversight, who has been nominated by President Biden, has spent months reviewing the capital rules of America’s largest banks, and its results have been hotly anticipated: Bank lobbyists have warned for months about changes he might propose. Mid-size banks in particular have been blunt, saying any increase in regulatory requirements would be costly for them, limiting their ability to lend.

Monday’s letter made it clear why the banks are worried. Mr. Barr wants to update capital requirements based on a bank’s risk to “better reflect credit, trading and operational risks,” he said in his remarks at the Bipartisan Policy Center in Washington.

For example, banks would not be able to rely on internal models to estimate certain types of credit risk — the chance of loan losses occurring — or for market risks that are particularly difficult to predict. Moreover, banks will be required to tailor risk to individual trading desks for particular asset classes, rather than to a company level.

These changes will increase capital requirements for market risks By correcting loopholes in the existing rules,” Mr Barr said.

Perhaps anticipating further banking decline, Mr. Barr also listed existing rules he was not planning to tighten, among them special capital requirements that apply only to the largest banks.

The new proposal would also try to address weaknesses that were exposed early this year, when a string of major banks collapsed.

One of the factors that led to the Silicon Valley bank’s demise — and sent a shockwave through the mid-cap banking sector — was that the bank was sitting on a pile of unrealized losses in securities classified as “available-for-sale.”

The lender was not required to calculate these paper losses when he was calculating how much capital he needed to get through a difficult period. And when she had to sell securities to raise cash, the losses came back in a big way.

He said the amendments proposed by Mr. Barr would require banks with assets of $100 billion or more to account for unrealized losses and gains on these securities when calculating their regulatory capital.

The changes will also lead to tighter supervision of a wider group of large banks. Mr. Barr said his tougher rules would apply to companies with assets of $100 billion or more — lowering the threshold for stringent oversight, which now applies the tougher rules to banks that are internationally active or with assets of $700 billion or more. Of the country’s 4,100 banks, 30 have $100 billion or more in assets.

Mr. Katz said extending the tough rules to a broader group of banks was the most notable part of the proposal: Such an adjustment was expected based on recent statements by other Fed officials, he said, but it is “a big change.”

The bank bombings earlier this year showed that even much smaller banks have the potential to unleash chaos if they fail.

“However, we won’t know how significant these changes will be until the lengthy rulemaking process over the next two years begins,” said Dennis Kelleher, CEO of the nonprofit Better Markets.

Mr. Keeler said Mr. Barr’s ideas generally sound good, but added that he was troubled by what he saw as a lack of urgency among the regulators.

“When it comes to bailing out the banks, they act with urgency and decisiveness, but when it comes to regulating the banks enough to prevent collapses, it is slow and takes years.”

Bank lobbyists criticized Barr’s announcement.

“It appears that Barr, the vice chairman of the Federal Reserve to oversee US banks, needs more capital, without providing any evidence as to why,” Kevin Frommer, CEO of lobbying group Financial Services Forum, said in a statement. news media on Monday.

“The additional capital requirements on America’s largest banks will result in higher borrowing costs and fewer loans for consumers and businesses – slowing our economy and impacting the most impactful margin,” Mr. Frommer said.

Susan Wachter, a professor of finance at the Wharton School of the University of Pennsylvania, said the proposed changes are “long overdue.” She said it was a relief to know there was a plan underway to make it work.

The Fed vice chair hinted that additional bank supervision adjustments inspired by the March 2023 turmoil are still to come.

“I will seek further changes in regulation and supervision in response to recent banking pressures,” Mr. Barr said in his speech. “I expect to have more to say on these topics in the coming months.”