Major U.S. bank capital reforms will get underway today.
PacWest, A U.S. lender which had been struggling to recover from the downfall of Silicon Valley Bank in March, said it planned to merge with Banc of California, combining with $400 million in financing from private equity firms.
The announcement reminded market observers that the U.S. banking crisis is still not over and still faces questions about its strength, especially as the sector struggles with high interest rates and lower profitability.
Federal Reserve regulators known as the Federal Deposit Insurance Corporation, together with the Office of the Comptroller of the Currency are putting together a complicated overhaul of new capital standards for U.S. banks today aimed at making U.S. lenders stronger, more resilient, and better prepared for shocks. Last spring, Silicon Valley Bank, Signature Bank, and First Republic failed, triggering deposit withdrawals across the banking world.
The new capital proposals are expected to face scrutiny and pushback from the banking sector, which could argue that higher capital requirements could restrict lending.
The Fed Vice Chair for Supervision Michael Barr could raise capital requirements for the largest, most complex banks, who will be asked to hold an additional 2 percentage points of capital — or an additional $2 of capital for every $100 of risk-weighted assets.
This would include institutions with as few as $100 billion in assets, meaning roughly 30 banks in total, which would be a departure from the existing framework covering internationally active banks and those with at least $700 bn.
Rebuking the U.S. Bank capital requirements
The suggested changes are part of the US version of Basel III that was developed following the 2008 crisis by the Basel Committee on Banking Supervision.
A key element of the revised rules will be “risk weights” applied to various assets that banks hold, essentially meaning that the riskier the assets are, the more capital (weight) banks will be required to set aside to absorb any future losses. Assets can include Treasuries, mortgages, derivatives, and cryptocurrencies.
The Fed’s vice chair for supervision, Michael S Barr, outlined these changes in a July 10 speech.
The president and CEO of the Securities Industry and Financial Markets Association, Kenneth Bentsent, rebuked Barr’s recommendations, saying: “As currently considered, the US Basel III endgame will significantly overhaul the current risk-based capital framework. We anticipate it will increase capital for banks’ trading activities by almost 60%. We fail to see the rationale for such an increase.”
Other critics argued there would be negative impacts stemming from these updated capital requirements, including stymying economic growth by constraining banks’ capacity to lend and support market-making activities.
To alleviate these concerns, a phase-in period is anticipated, with affected institutions potentially generating the required capital via retained earnings over a period of two years.
Other recommendations include new obligations linked to long-term debt for all institutions with assets above $100bn.
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