Evening Brief – 07.10.23

Following a ‘holistic evaluation’ of capital for major banks “to enhance their resilience and ability to serve communities, households, and businesses,” Fed Vice-Chair of Supervision Michael Barr stated in a report released Monday that he is leading a multi-year initiative to increase capital requirements for banks.

Barr managed expectations by explaining that the focus of the review was on building resilience rather than attempting to address every conceivable risk, as the financial system is complex and constantly evolving.

“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.

Among the regulatory recommendations to be introduced over time is to apply enhanced risk-based capital rules to banks with $100 billion or more in assets, down from a threshold of $700 billion.

“Our recent experience shows that even banks of this size ($100 billion in assets) can cause stress that spreads to other institutions and threatens financial stability,” Barr said in his speech at the Bipartisan Policy Center.

Specifically, Barr is proposing to require banks with assets of $100 billion or more to account for unrealized losses and gains in their available-for-sale (AFS) securities when calculating their regulatory capital.

“This change would improve the transparency of regulatory capital ratios, since it would better reflect banking organizations’ actual loss-absorbing capacity,” Barr said.

“Realizing the losses from these securities, without adequate capital to protect from those losses, was an important part of the set of events that triggered the run on Silicon Valley Bank.”

The takeaway is that under the plan, the largest banks could be required to hold an additional 2 percentage points of capital, or an additional $2 of capital for every $100 of risk-weighted assets.