The Federal Reserve’s vice chair for supervision on Monday defended a proposal by bank regulators to raise capital requirements at the nation’s largest banks, saying “the benefits of the proposal would outweigh the costs.”
Speaking to the American Bankers Association in Nashville, Michael Barr addressed criticism from bankers and trade groups that argue the stricter requirements would force institutions to pull back on lending.
“The proposal is projected to raise capital for large banks,” Barr said. “This may result in higher funding costs. But this is only half the story. Capital also enables banks to absorb more losses without risking their ability to repay their creditors.”
The Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, which unveiled the proposal in July, say the rules would align U.S. banks more closely with international standards, and narrow gaps that have persisted since the 2007-08 financial crisis.
Under the proposal, the U.S.’s eight global systemically important banks would see a roughly 19% increase in the amount of capital they’d have to hold.
The proposed changes also follow this spring’s banking crisis, which saw the collapse of three regional lenders. Regulators say the increased capital requirements they are proposing would help shield banks from future failures.
Barr pushed back on claims made by several top bank CEOs and industry trade groups that the stringent changes would have a negative impact on the economy by hampering lenders’ ability to extend credit.
“The effective rise in capital requirements related to lending activities in the current proposal is a small portion of the estimated overall capital increase,” he said, adding the bulk of the rise in required capital anticipated in the rule is attributed to trading and other activities outside of lending.
Barr said trading has generated outsized losses at large banks and is an area where current rules have shortcomings.
“The estimated increase in capital required for lending activities on average — inclusive of both credit risk and operational risk requirements — is limited,” he said.
Barr noted that while the industry criticized higher capital requirements introduced in the wake of the 2007-08 financial crisis, the banking sector has remained strong.
"As banks increased their capital cushions, their profitability grew, as did their market valuation," he said. "This is not to dismiss arguments that higher capital could harm the economy — just to note that similar warnings were not borne out in recent experience."
Regulators are open to receiving comments from industry stakeholders on how the proposal could be improved, he said.
“We recognize that the cost of funding for a specific loan would depend on the specific risk weight for that activity, and that there may be other channels by which higher capital requirements could matter,” he said. “This is an area where commenters can shed light on additional considerations for the cost and benefits of the rule.”
Regulators are taking public comment until Nov. 30, with the aim of issuing a final rule next year and phasing it in gradually between July 2025 and June 2028.
During a question-and-answer session following the speech, ABA CEO Rob Nichols asked Barr why he thought the capital increases are necessary, given the strength of the U.S. financial system.
“The safety and soundness of the banking system is quite strong. It doesn't mean that we can't make improvements,” Barr said. “We’re not fixing things in stone. We learned, for example, in the crisis this spring, that perhaps large organizations that were not subject to the pass-through of unrealized losses should have been subject to the pass-through of unrealized losses in their capital treatment.”