Fed cop Michael Barr defends higher capital requirements as bankers bristle

By Steve Gelsi

American Bankers Association's Rob Nichols says regulators missed opportunities to address bank weaknesses under existing rules

Federal Reserve Vice Chair for Supervision Michael Barr said Monday that a complex government plan to boost capital requirements for large U.S. banks would help strengthen the financial system, even as the bank industry fired back that the new rules would discourage growth.

Speaking at the American Bankers Association's annual convention, Barr encouraged lenders to participate during the Fed's comment period, which ends on Nov. 30, for 1,100 pages of new capital-requirement regulations.

Democrats and Republicans have both voiced objections to the banking rules, which will raise capital requirements for all U.S. banks and strengthen oversight of banks with more than $100 billion in assets under management.

The inclusion of rules for smaller banks came after the failures of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.

Speaking at the ABA gathering in Nashville, Tenn., Barr said the U.S. banking system remains sound and resilient, "but it doesn't mean we can't make improvements."

The U.S. Federal Reserve is not setting things in stone and the government does learn lessons from past missteps, such as not getting a clear enough picture of unrealized losses at banks, Barr said.

Barr referenced the unrealized losses on the balance sheet of Silicon Valley Bank that caused the bank to turn to capital markets in a move that sparked a run on that bank in March. The Federal Deposit Insurance Corp. stepped in and handled a distressed sale of the bank to First Citizens Bancshares Inc. (FCNCA).

Also read: Senators grill SVB, Signature Bank CEOs for putting profits ahead of shareholders and depositors in collapse

"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," Barr said.

The Fed remains "completely open" to talks about the balance between competitive equity at the largest and smallest banks against the stringency of capital rules.

"These things are legitimate open areas for conversation and we'd welcome comment on them," he said.

The Fed is also inviting comment on whether the new regulations will push more capital into the so-called shadow banking world of private credit.

"I'm always worried about the risks inside the system and outside the system," Barr said. "You want to get that balance right."

Barr agreed that the capital requirements known as the Basel III endgame rules would be more stringent in the U.S. than in European Union countries, but he noted that that has been the case for years and that the disparity between the two regulatory regimes would not necessarily change.

Barr also defended the proposed capital rules as a fix that regulators found to be necessary after studying potential weaknesses in the system in recent years.

ABA Chief Executive Rob Nichols said that regulators missed opportunities to address, under existing rules, the weaknesses in the three banks that collapsed, and that they are now proposing changes that could impede economic growth.

"Regulators had identified issues at each bank, but for whatever reason, chose not to use all of the tools at their disposal to force changes," Nichols said in his remarks.

The new Basel III endgame rules take "a on-size-fits-all approach" and fail "to consider the economic consequences of forcing banks to hold excessive capital in reserve," Nichols said.

Meanwhile, bank stocks fell back harder than the broader market on Monday in the wake of the deadly attacks in Israel that have claimed at least 1,200 lives since fighting broke out over the weekend.

Also read: Democrats join GOP, banks in pushing back on proposed bank capital rules

-Steve Gelsi

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10-09-23 1249ET

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