Capital requirement too low, banks told

Federal Reserve regulator defends proposed hike against Wall Street criticism

The U.S. Federal Reserve’s top bank watchdog is defending a sweeping government plan that would significantly boost capital requirements for Wall Street’s biggest banks.

Michael Barr, the Fed’s vice chair for supervision, told executives at an event hosted by the American Bankers Association that regulators’ July proposal would bolster the U.S. financial system’s safety.

The ABA is one of several industry lobby groups that have asked regulators to scuttle the plan.

Barr said on Monday that the benefits of the plan would outweigh costs.

“The proposal is projected to raise capital for large banks,” he said in remarks prepared for the conference. “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 effort by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency is tied to Basel III, an international regulatory agreement that began more than a decade ago in response to the 2008 financial crisis. Democratic regulators argue the failures of Silicon Valley Bank and Signature Bank in March, followed by First Republic Bank’s collapse in May, injected urgency into the need for tougher rules.

As proposed, midsize firms such as Regions Financial Corp., KeyCorp and Huntington Bancshares Inc. would face the kind of stringent requirements that had been reserved for even larger lenders.

Meanwhile, the eight largest banks may have to set aside about 19% more in capital.

Wall Street’s biggest lenders say that such increased capital requirements could slow the U.S. economy and put them on weaker footing against non-bank lenders and European rivals.

Those giants had been preparing for the regulations to possibly wipe out almost all of the excess capital they stashed away over the past decade, likely crimping shareholder buybacks for years to come.

Republican lawmakers have also taken issue with everything from the plan’s scope to its substance and the process used to draft it.

On Monday, Barr urged bankers to submit comments on how the proposal could be improved.

Regulators are in the process of receiving feedback, and may make changes before holding another vote to finalize any plan.

Critics of the plan, which would raise the so-called risk weights for some residential mortgages, could make it harder for first-time or minority borrowers to get a mortgage.

“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,” said Barr. “This is an area where commenters can shed light on additional considerations for the cost and benefits of the rule,” he added.

Barr added that under the plan, much of the increase in capital set aside would stem from trading and activities besides lending. He said current rules covering those parts of banks’ businesses have “shortcomings,” and pushed back on criticism that regulators hadn’t done enough to justify the proposed changes.

Wall Street’s biggest lenders say that such increased capital requirements could slow the U.S. economy and put them on weaker footing against non-bank lenders and European rivals. Those giants had been preparing for the regulations to possibly wipe out almost all of the excess capital they stashed away over the past decade, likely crimping shareholder buybacks for years to come.