Federal Reserve vice chair of supervision Michael Barr pushed back against recent claims that a new US proposal requiring banks to bolster their capital buffers would curb lending and hurt the economy, telling bankers that their industry thrived after regulators imposed changes following the 2008 financial crisis.
“The private costs of capital must be weighed against the social benefits of higher capital in creating a healthier, more resilient financial system and reducing the likelihood of financial crises,” the Fed official said in a speech made Monday to the American Bankers Association in Nashville.
He cited similar concerns bankers had about lending and economic growth in the years after the 2008 crisis, as regulators asked banks to boost their capital cushions to protect against future blowups. Yet, he said, the US economy grew, banking profits recovered to historical averages, and the banking system expanded in size to $23 trillion in assets from $12 trillion.
“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.”
US regulators proposed their most recent set of changes in July, saying banks affected by the changes would see an aggregate 16% increase in their capital requirements. Regulators said the increase would primarily affect the largest banks and that most have enough capital already to comply. Capital is the buffer banks have to hold to absorb future losses.
Regulators also proposed changes in how these banks assess risks and widened the scope of the new rules to institutions with as few as $100 billion in assets, meaning roughly 30 banks would be subject to the same calculations.
Regulators are accepting comments on this proposal through Nov. 30.
Banks have reacted aggressively to the suggested changes. Several bank trade groups sent a letter to the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency asking them to “re-propose” the rule, arguing that the initial proposal “relies on data and analyses that the agencies have not made available to the public.”
JPMorgan CEO Jamie Dimon called the new proposal “hugely disappointing,” warning that it could push more lending into private credit markets.
“I would love to know what they really want to accomplish,” Dimon said.
Goldman Sachs CEO David Solomon also didn’t hold back. “I don’t think these rules make sense,” he said.
Financial Services Forum President and CEO Kevin Fromer on Monday said “the largest banks have tripled their capital since the crisis and have clearly demonstrated their strength and resilience. There is no evidence in the proposal or today’s remarks that justifies a 20 percent increase, and no one should downplay the costs of these increases to the economy.”
Barr said the bulk of the increase in proposed capital is tied to trading and other areas besides lending — activities that he says have generated large losses at big banks and areas where he feels current rules have shortcomings.
“The effective rise in capital requirements related to lending activities in the current proposal is a small portion of the estimated overall capital increase,” Barr said.
Barr estimated the higher requirement would increase the costs to banks for funding the average lending portfolio by up to 3 basis points.
Though, he added, “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 the Fed is very interested in public feedback for the capital proposal but that since the Fed has just begun receiving comments, he couldn’t say how the rules could evolve.
Barr noted that the Fed has already heard concerns that the proposed risk-based capital treatment for mortgage lending, tax credit investments, trading activities, and activities that generate fee-based income might overestimate the risk of those activities.
Regulators have argued the changes are needed to make lenders stronger, more resilient, and better prepared for shocks like the crisis of this spring, when the failures of Silicon Valley Bank, Signature Bank, and First Republic triggered deposit withdrawals across the banking world.
Barr said Monday that banks need to be prepared for the worst. After the 2008 crisis, he said, it took six years for employment to recover. The cost of a financial crisis could range from $5 trillion to $25 trillion, he added.