Capital Proposal by Barr to have a 'restricted' effect on borrowing fees
In a move aimed at enhancing the resilience of the financial sector, the Federal Reserve, FDIC, and OCC unveiled a proposal in July to raise capital requirements for the eight largest U.S. banks. This move comes in the wake of the spring banking crisis that saw the collapse of three regional lenders.
The proposed changes would result in a roughly 19% increase in the amount of capital these banks would have to hold. This is intended to shield them from future failures and maintain financial stability, thereby protecting the economy from risks posed by potential losses during crises.
Michael Barr, the Federal Reserve Vice Chairman for Supervision, defends these measures. He argues that trading, an area where current rules have shortcomings, has generated outsized losses at large banks. Barr believes that large organizations that were not subject to the pass-through of unrealized losses in their capital treatment during the spring crisis should have been.
The banking sector's profitability and market valuation have grown as banks increased their capital cushions. However, the estimated increase in capital required for lending activities on average is limited.
Barr has pushed back on claims that the stringent changes would have a negative impact on the economy by hampering lenders' ability to extend credit. Instead, he maintains that improvements can still be made even though the banking system's safety and soundness is strong.
A final rule is aimed to be issued next year, with a phasing-in period between July 2025 and June 2028. Regulators are open to receiving comments from industry stakeholders on the proposal until Nov. 30. The public comment period ends on Nov. 30.
The ABA CEO, however, has questioned the necessity of these capital increases, given the strength of the U.S. financial system. The proposal is projected to raise capital for large banks, with regulators stating that the increased capital requirements would help ensure that the U.S.'s largest banks remain resilient to economic downturns, as assessed by annual stress tests.
Regulators are also considering additional considerations for the cost and benefits of the rule, as per comments from stakeholders. The proposed changes follow a pattern of regulators taking steps to strengthen the financial system in response to recent crises.
