US Regulators Mull 16% Increase in Bank Capital Requirement

<p>Bank supervisors in the
United States have put forward a proposal that could see capital requirements
for leading US banks shoot up by 16%. The move comes as the regulators seek to
increase their oversight of the banking industry, particularly in the aftermath
of the <a href="https://www.financemagnates.com/cryptocurrency/silvergate-bank-announces-voluntary-liquidation-amid-troubles/" target="_blank" rel="follow">recent US banking
crisis</a>. </p><p>A
Multi-Agency Campaign</p><p>On
Thursday, the Department of Treasury’s Office of the Comptroller of the
Currency, the Federal Reserve System and the Federal Deposit Insurance
Corporation released <a href="https://www.fdic.gov/news/board-matters/2023/2023-07-27-notice-dis-a-fr.pdf" target="_blank" rel="follow">a 1089-page-long
document</a> detailing
its suggestions for
amendments to regulatory capital rule for large banking organizations in the
country. </p><p>Citing
agency officials, Bloomberg and Reuters reported that the proposed requirements
will lead to an even bigger 19% increase for eight of the biggest banks in the
United States. Furthermore, for banks with $250 billion in
assets, required capital could
jump an average of 10%, with only 5% more capital
for those
with assets between $100 billion and $250 billion. Some of the largest banks in
the US include JP Morgan Chase, Bank of America, Wells Fargo, Citigroup and US
Bank.</p><p>In the
document, the regulators proposed replacing current requirements that permit
banks to use their internal models to calculate credit and operation risks with
certain ‘standardized approaches’. They also want to substitute current rules
for market risk and credit valuation adjustment with so-called ‘revised approaches’.</p><p>The bank
supervisors noted that the changes will be largely consistent with Basel
III, which is the third set of Basel Accords or international banking rules
developed by the Basel Committee on Banking Supervision after the 2007/2008
financial crisis.</p><p>“The
revisions set forth in the proposal would improve the calculation of risk-based
capital requirements to better reflect the risks of these banking organizations’
exposures, reduce the complexity of the framework, enhance the consistency of
requirements across these banking organizations, and facilitate more effective
supervisory and market assessments of capital adequacy,” the agencies
explained. </p><p>Industry
Kicks</p><p>However,
reacting to the development, the industry stakeholders have criticized the proposal,
noting that it could force organizations out of the industry to non-banking
sectors. Some also argued
that it could put US banks in a position of disadvantage, especially compared
to their European counterparts. </p><p>According
to Reuters, Kenneth Bentsen, the Chief Executive Officer of the Securities
Industry and Financial Markets Association, described the proposal as
‘misguided’. Kenneth contended that the regulators lacked justification for such a move
considering how resilient the US financial market has been following the 2007/2008
global financial crisis.</p><p>However,
the regulators argued otherwise, with officials saying that most banks are
already well-capitalized to meet the rule. They pointed out that banks
with smaller financial muscles can meet the requirements with at most two years
of retained earnings, Reuters reported.</p><p>“[We]
assessed the likely effect of the proposal on economic activity and resilience,
and expect that the benefits of strengthening capital requirements for large
banking organizations outweigh the costs,” the agencies noted in the document.</p><p>
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This article was written by Solomon Oladipupo at www.financemagnates.com.