Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, recently announced changes to a proposed set of U.S. banking regulations that will significantly reduce the extra capital that the largest institutions will be required to hold. The regulatory overhaul, known as the Basel Endgame, was initially introduced in July 2023 and aimed to increase capital requirements for the world’s largest banks by approximately 19%. However, after considering feedback from various stakeholders, including banks, business groups, and lawmakers, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. have decided to resubmit the proposal with a more modest 9% increase to big bank capital.
The decision to revise the proposal reflects a careful consideration of the benefits and costs associated with increasing capital requirements. The original plan sought to enhance safety and tighten oversight of risky activities within the banking sector, particularly in relation to lending and trading. However, critics argued that raising capital requirements could make loans more expensive or harder to obtain, potentially pushing more financial activity towards non-bank providers. Trade organizations and industry executives, including JPMorgan Chase CEO Jamie Dimon, voiced their concerns regarding the potential negative impact of the original proposal. It seems that their efforts to push back against the demands have proven successful, as the revised version of the proposal offers a more balanced approach.
While the revised proposal benefits large banks, it also addresses concerns related to midsized banks. Regional banks with assets ranging between $100 billion and $250 billion will be excluded from the latest proposal, with the exception of a requirement to recognize unrealized gains and losses on securities in their regulatory capital. This measure aims to strengthen capital requirements by approximately 3% to 4% over time. The inclusion of this provision appears to be a response to the failures of midsized banks last year, which were caused by deposit runs triggered by unrealized losses on bonds and loans amidst significantly higher interest rates.
It is worth noting that these regulatory changes are part of a broader response to the 2008 global financial crisis. The goal is to strike a balance between promoting financial stability and ensuring that banks can continue to provide loans and support economic growth. By revising the proposal, regulators are demonstrating their willingness to consider feedback from various stakeholders and make adjustments that mitigate potential unintended consequences.
In conclusion, the Federal Reserve’s decision to reduce the increase in capital requirements for large banks reflects a careful evaluation of the benefits and costs associated with such regulations. By resubmitting the proposal with a more modest 9% increase, regulators aim to strike a balance between enhancing safety and maintaining the accessibility of loans. The exclusion of midsized banks from the latest proposal, except for the requirement to recognize unrealized gains and losses on securities, further addresses concerns related to deposit runs and unrealized losses. These regulatory changes demonstrate the responsiveness of regulators to industry feedback and their commitment to promoting a stable and resilient banking system.
