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Wall Street Rejoices as Regulators Agree to Modify Capital Plan
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It seems that the Wall Street can finally rejoice as the Federal Reserve is reconsidering its proposed capital plan after facing pushback from lenders and community groups.
Fed chairman, Jerome Powell, and the Federal Deposit Insurance Corporation (FDIC) chairman, Martin Gruenberg, recently signaled that officials might scale back their plans of making big banks hold more capital.
Powell told lawmakers that “I expect there will be material and broad changes” and “we won’t hesitate” to make changes to the capital rule, if required.
Gruenberg stated, “I certainly think we anticipate making changes in the final rule based on the extensive comments that we've received.”
Fed’s vice chair for supervision, Michael Barr, who actually proposed the plan, initially defended it as he was of the opinion that the rule would ensure that banks could withstand future crises. However, now, he has also said that he is open to changes.
Powell, Barr and other senior Fed officials will need to vote on a final plan before the rules can take hold.
Proposed Plan
With an aim to bolster the banking industry’s resilience following the failures of Silicon Valley Bank, Signature Bank and First Republic in early 2023, U.S. regulators, in July, proposed new rules for banks with at least $100 billion in total assets.
The proposal required banks to increase their capital levels (i.e., they should hold more buffer) to protect against future losses.
Regulators said that the increase would primarily affect banking giants like JPMorgan (JPM - Free Report) and Bank of America (BAC - Free Report) , which already have enough capital to comply. Per agency officials, the eight largest banks, including JPM and BofA, which have huge trading desks, would be required to increase their capital 19%, on average.
The mid-sized regional banks like Fifth Third Bancorp (FITB - Free Report) , Regions Financial Corporation (RF - Free Report) and others that have $100-$250 million in assets, would likely see their capital requirements rise 5%.
Also, regulators proposed changes in how banks assess risks. Barr felt that there should be an end to the practice of relying on banks’ own individual estimates of their risks, noting that banks tend to underestimate their credit risks.
Per the plan, banks would be required to model risk at the level of individual trading desks for particular asset classes instead of at the firm level, acting to raise capital used to protect against market risks.
In addition to the above-mentioned changes, the proposal required the mid and small-sized banks like FITB and RF to issue adequate long-term debt to absorb losses in the event of a potential seizure, which would bring these banks in line with the larger ones like JPMorgan, which already have their own set of requirements.
Further, banks with at least $100 billion in assets would have to count any unrealized available-for-sale securities losses against their regulatory capital.
The smaller banks were included in the proposed plan because Barr said, “Our recent experience shows that even banks of this size can cause stress that spreads to other institutions and threatens financial stability.”
While proposing the stricter requirements, officials argued that the changes were important to make the lenders stronger, more resilient and better prepared for shocks similar to the regional banking crisis, which triggered deposit withdrawals across the banking world.
However, the rule faced backlash from lenders who said that they are more resilient today than they were during the 2008 financial crisis, and the higher requirements would restrict lending and hurt liquidity in the markets.
If the banks raise their long-term debt issuances, it will likely marginally increase funding costs, leading to contractions in net interest margins.
Notably, there were a few people who believed that the failures of the regional banks were caused primarily by poor risk management and deficient supervision, and not because of a lack of capital.
The fact that the regulators are ready to make changes to the proposed plan after receiving pressure from the banking industry reflects that big banks now hold power in Washington, which is completely opposite to the harsh political scrutiny they received in the aftermath of the 2008 financial crisis.
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Wall Street Rejoices as Regulators Agree to Modify Capital Plan
It seems that the Wall Street can finally rejoice as the Federal Reserve is reconsidering its proposed capital plan after facing pushback from lenders and community groups.
Fed chairman, Jerome Powell, and the Federal Deposit Insurance Corporation (FDIC) chairman, Martin Gruenberg, recently signaled that officials might scale back their plans of making big banks hold more capital.
Powell told lawmakers that “I expect there will be material and broad changes” and “we won’t hesitate” to make changes to the capital rule, if required.
Gruenberg stated, “I certainly think we anticipate making changes in the final rule based on the extensive comments that we've received.”
Fed’s vice chair for supervision, Michael Barr, who actually proposed the plan, initially defended it as he was of the opinion that the rule would ensure that banks could withstand future crises. However, now, he has also said that he is open to changes.
Powell, Barr and other senior Fed officials will need to vote on a final plan before the rules can take hold.
Proposed Plan
With an aim to bolster the banking industry’s resilience following the failures of Silicon Valley Bank, Signature Bank and First Republic in early 2023, U.S. regulators, in July, proposed new rules for banks with at least $100 billion in total assets.
The proposal required banks to increase their capital levels (i.e., they should hold more buffer) to protect against future losses.
Regulators said that the increase would primarily affect banking giants like JPMorgan (JPM - Free Report) and Bank of America (BAC - Free Report) , which already have enough capital to comply. Per agency officials, the eight largest banks, including JPM and BofA, which have huge trading desks, would be required to increase their capital 19%, on average.
The mid-sized regional banks like Fifth Third Bancorp (FITB - Free Report) , Regions Financial Corporation (RF - Free Report) and others that have $100-$250 million in assets, would likely see their capital requirements rise 5%.
Also, regulators proposed changes in how banks assess risks. Barr felt that there should be an end to the practice of relying on banks’ own individual estimates of their risks, noting that banks tend to underestimate their credit risks.
Per the plan, banks would be required to model risk at the level of individual trading desks for particular asset classes instead of at the firm level, acting to raise capital used to protect against market risks.
In addition to the above-mentioned changes, the proposal required the mid and small-sized banks like FITB and RF to issue adequate long-term debt to absorb losses in the event of a potential seizure, which would bring these banks in line with the larger ones like JPMorgan, which already have their own set of requirements.
Further, banks with at least $100 billion in assets would have to count any unrealized available-for-sale securities losses against their regulatory capital.
The smaller banks were included in the proposed plan because Barr said, “Our recent experience shows that even banks of this size can cause stress that spreads to other institutions and threatens financial stability.”
While proposing the stricter requirements, officials argued that the changes were important to make the lenders stronger, more resilient and better prepared for shocks similar to the regional banking crisis, which triggered deposit withdrawals across the banking world.
However, the rule faced backlash from lenders who said that they are more resilient today than they were during the 2008 financial crisis, and the higher requirements would restrict lending and hurt liquidity in the markets.
If the banks raise their long-term debt issuances, it will likely marginally increase funding costs, leading to contractions in net interest margins.
Notably, there were a few people who believed that the failures of the regional banks were caused primarily by poor risk management and deficient supervision, and not because of a lack of capital.
The fact that the regulators are ready to make changes to the proposed plan after receiving pressure from the banking industry reflects that big banks now hold power in Washington, which is completely opposite to the harsh political scrutiny they received in the aftermath of the 2008 financial crisis.