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Fed To Strengthen Capital Requirements For Big Banks After Recent Failures

Proposed changes would mandate larger banks to hold additional capital as buffer against potential losses.

In a speech delivered on Monday at the Bipartisan Policy Center in Washington, D.C., the Federal Reserve Vice Chair for Supervision Michael Barr announced plans to enhance the financial cushions for larger banks in order to bolster the resilience of the banking system following a series of bank failures this year.

Federal Reserve Board Chairman Jerome Powell arrives at a hearing before Senate Banking, Housing, and Urban Affairs Committee at Dirksen Senate Office Building on June 22, 2023, on Capitol Hill in Washington, DC. The committee held a hearing to examine the Semiannual Monetary Policy Report to the Congress. (Alex Wong/Getty Images) 

The proposed changes, expected to be formally introduced this summer, stem from a comprehensive review of capital requirements for big banks.

Under the new Fed’s plan, the largest banks could be mandated to hold an additional 2 percentage points of capital, equivalent to an extra $2 for every $100 of risk-weighted assets, as a buffer to absorb potential losses.

The exact amount of additional capital will vary based on a bank’s business activities, with the largest increases anticipated for the global systemically important banks (G-SIBs). This move is intended to ensure that the financial system remains resilient even in the face of severe stress.

“Fourteen years of stress testing, and the real-life surprises during that time, including the pandemic and the bank stresses this spring, have made it clear that stress tests need to be stressful to adequately prepare banks for unanticipated events,” said Barr in his remarks.

Barr planned to extend the capital rules to banks with assets of at least $100 billion, a step that presently only applied to the largest institutions.

By implementing these changes, regulators aim to ensure banks are better equipped to withstand various risks and contribute to a stable and thriving economy.

“The failures of SVB and other banks this spring were a warning that banks need to be more resilient, and need more of what is the foundation of that resilience, which is capital.”

Silicon Valley Bank, Signature Bank, and First Republic Bank were among the biggest bank failures since the 2008 Financial Crisis. Each of the banks were taken over by the Federal Deposit Insurance Corporation (FDIC) as SVB and First Republic Bank were seized by the California Department of Financial Protection and Innovation. Both California based banks were based in the Bay Area region.

President Joe Biden reassured the American public that the banking system was safe and that the consumer balances were in good hands.

Recently, the Consumer Financial Protection Bureau ordered Bank of America to pay $100 million to consumers in double dipping on fee with insufficient funds in bank accounts and withholding rewards to credit card customers.

Produced in association with Benzinga

Edited by Alberto Arellano and Joseph Hammond

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