With the debate over bank capital requirements heating up again, all those involved should pause to reflect on the root causes of this year’s banking failures. Experience shows that marginal increases in capital ratios may have far less future impact than low-cost programs to upgrade banking supervision.
LONDON – Bank capital is back in the financial headlines. In late July, US banking regulators, led by the Federal Reserve, announced plans to finalize the so-called Basel 3 reforms (which banks like to call Basel 4, owing to their significant impact). The aim, according to a joint agency proposal, is “to improve the strength and resilience of the banking system” by modifying large capital requirements to better reflect underlying risks, and by applying more transparent and consistent requirements.
The announced proposals are tougher than many expected. They will cover more banks – including some that had benefited from Trump-era concessions – and they will require banks to include unrealized losses from securities in their capital ratios (among other changes). Overall, US regulators expect the most complex banks to increase their capital by 16%.
US banking supervisors, led by Fed Vice Chair Michael S. Barr, clearly have been emboldened by the spate of bank failures that started with the collapse of Silicon Valley Bank this past spring. But though the political mood has changed after that embarrassing episode, there is still fierce opposition to the new regulations. Last week, David Solomon, the CEO of Goldman Sachs, warned that the “new capital rules have gone too far … they will hurt economic growth without materially enhancing safety and soundness.” Likewise, JPMorgan Chase CEO Jamie Dimon believes they will increase the cost of credit, potentially making banks uninvestable.
LONDON – Bank capital is back in the financial headlines. In late July, US banking regulators, led by the Federal Reserve, announced plans to finalize the so-called Basel 3 reforms (which banks like to call Basel 4, owing to their significant impact). The aim, according to a joint agency proposal, is “to improve the strength and resilience of the banking system” by modifying large capital requirements to better reflect underlying risks, and by applying more transparent and consistent requirements.
The announced proposals are tougher than many expected. They will cover more banks – including some that had benefited from Trump-era concessions – and they will require banks to include unrealized losses from securities in their capital ratios (among other changes). Overall, US regulators expect the most complex banks to increase their capital by 16%.
US banking supervisors, led by Fed Vice Chair Michael S. Barr, clearly have been emboldened by the spate of bank failures that started with the collapse of Silicon Valley Bank this past spring. But though the political mood has changed after that embarrassing episode, there is still fierce opposition to the new regulations. Last week, David Solomon, the CEO of Goldman Sachs, warned that the “new capital rules have gone too far … they will hurt economic growth without materially enhancing safety and soundness.” Likewise, JPMorgan Chase CEO Jamie Dimon believes they will increase the cost of credit, potentially making banks uninvestable.