How US Regulators Are Boosting Big Banks’ Requirements for Cash

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Regulators are preparing to increase bank capital requirements following the notable bank collapses earlier this year. The Wall Street Journal reported that the capital requirements increase could be as large as 20% and could be implemented this month.

“The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses,” The Wall Street Journal detailed, adding that capital is the buffer banks are required to hold to absorb potential losses.

Currently, capital requirements range from 7% (for Ally Financial, for example) to 13.3% for Morgan Stanley and Goldman Sachs, according to a Federal Reserve report.

The Fed, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency are to propose and seek comment on the capital rules. If they move forward with the plan, it would be implemented over the coming years, according to The Wall Street Journal.

In December 2022, Fed vice chair for supervision Michael Barr said, “Empirical research supports the social benefits of strong capital requirements at banks, particularly when economic conditions weaken.”

“While poorly capitalized banks may be forced to shrink during bad times, better capitalized banks have the capacity to support the economy by continuing to lend to households and businesses through stressful conditions. And to the extent bank capital reduces the frequency or severity of financial crises, the public is much better off with strong capital,” added Barr, according to a transcript of his speech.

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However, some experts say the increase in capital requirements could be detrimental to consumers, as it could raise costs and push certain banks to stop offering certain services.

“Higher capital requirements are unwarranted,” Kevin Fromer — chief executive of the Financial Services Forum, which represents the largest U.S. banks — told The Wall Street Journal. “Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time.”

In March, Silicon Valley Bank and Signature Bank collapsed, forcing regulators to take measures to avoid more damage, stem the outflow of depositors and reassure jittery consumers. And on May 1, JPMorgan Chase acquired most of the assets and “assumed the deposits and certain other liabilities” of First Republic Bank following the bank’s seizure by the FDIC and ensuing “highly competitive bidding process.”

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