Fed’s Top Regulator Seeks to Beef Up Banking Reform

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The Silicon Valley Bank post-mortem is over. Now come the new regulations.

Speaking at a Bipartisan Policy Center event in Washington on Monday, Michael Barr, the Fed’s vice chair of supervision, outlined proposals for additional rules to regulate the banking industry — primarily in the form of beefing up capital requirements to help stave off another wave of agita-inducing banking runs like we saw this spring.

Stressed Out

Sometimes it takes a crisis to inspire change. In this case, it took two. Many of Barr’s proposed rules are merely the final steps of regulations laid out by global policymakers after the 2008 financial crisis — the so-called Basel III reforms, which call for banks to hold a leverage ratio (capital divided by total exposure) above 3%. The new proposals would raise capital requirements even more, and would subject mid-sized banks holding at least $100 billion in assets to as much scrutiny as their too-big-to-fail big brothers on Wall Street. Currently, only banks with at least $250 billion in assets face the most stringent of requirements, a threshold much higher than what SVB, First Republic, and Signature Bank each held just before their implosions.

Barr also proposed an overhaul of annual stress test rules, a change that may feel sorely needed given that the US division of the also-now-defunct bank Credit Suisse passed the Fed’s 2022 stress test with flying colors. The new rules, which could be approved as soon as this month by the Fed and fellow regulators, could reshape compliance in the industry:

  • Stress tests would be based on a new standardized system for estimating credit and operational risks, and would gauge banks’ ability to weather hypothetical recessions. “The proposed rules would end the practice of relying on banks’ own individual estimates of their own risk and instead use a more transparent and consistent approach,” Barr said.
  • Meanwhile, the new capital requirements would increase by 2 percentage points for large banks, essentially forcing them to hold an extra $2 of capital per each $100 they held in risk-weighted assets.

“In an obvious way, the failures of SVB and other banks this spring were a warning that banks need to be more resilient, and need more of what is the foundation of that resilience, which is capital,” Barr said.

Bank Shot: Critics are already decrying Barr’s proposed rules as an overzealous reaction to what was, at its core, mismanagement at SVB. Barr, however, disagrees: “It is not logical to argue that failings in supervision must mean that SVB was adequately capitalized — it wasn’t,” he said, adding “Capital is and has always been the foundation of a bank’s safety and soundness.”