Capital proposal by Barr predicted to have minimal influence on borrowing expenses
The Federal Reserve's Vice Chair for Supervision, Michael Barr, has defended a proposal to raise capital requirements at the nation's largest banks. The move is aimed at shielding banks from future failures, following this spring's banking crisis.
In a recent speech, Barr mentioned one lesson learned from the crisis was that large organizations not subject to the pass-through of unrealized losses should have been. He noted that while the industry criticized higher capital requirements introduced after the 2007-08 financial crisis, the banking sector has remained strong.
The proposal, which is projected to raise capital for large banks, would result in higher funding costs for banks. However, Barr pushed back on claims that the stringent changes would have a negative impact on the economy. He emphasized that the banking system's safety and soundness is strong, but improvements can still be made.
The eight globally systemically important banks affected by the capital increase requirements include Citigroup, Bank of America, JP Morgan Chase, and Wells Fargo. These banks are designated by the Financial Stability Board as systemically important financial institutions and must meet higher capital standards under Basel III.
The exact list of all eight banks is not fully detailed, but these four are confirmed among them. The proposed changes would see a roughly 19% increase in the amount of capital these banks would have to hold.
Regulators are taking public comment until Nov. 30 on the proposed capital requirements. They are open to receiving comments from industry stakeholders on how the proposal could be improved. Regulators also recognize that there may be other channels by which higher capital requirements could matter, and they acknowledge that the cost of funding for a specific loan would depend on the specific risk weight for that activity.
During the question-and-answer session following the speech, ABA CEO Rob Nichols asked Barr why the capital increases are necessary, given the strength of the U.S. financial system. Barr responded by stating that improvements can always be made to ensure the resilience of the banking sector.
The final rule is aimed to be issued next year, with a phasing-in period between July 2025 and June 2028. Regulators acknowledge that the proposal aligns U.S. banks more closely with international standards.
The proposal comes as regulators continue to assess the impact of the banking crisis and look for ways to strengthen the financial system. Barr's defense of the proposal underscores the importance of maintaining strong capital requirements to protect the banking sector and the economy as a whole.
