Big Banks Could Face 20% Boost to Capital Requirements

Silicon Valley Bank’s failure unnerved the lending industry.
Silicon Valley Bank’s failure unnerved the lending industry.


  • Those relying on fees might need larger buffers to absorb losses under planned rules

U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.

The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. 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.

Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses.

The plan to ratchet up capital is expected to be the first of several steps to beef up rules for Wall Street, a shift from the lighter regulatory approach taken during the Trump administration. The industry says more stringent requirements aren’t needed, could force more banks to merge to stay competitive and could make it harder for Americans to get loans from banks.

Tougher rules were already on the way for the biggest lenders before the March failures of Silicon Valley Bank and another bank sent tremors through the industry. Since then, regulators have said they plan to apply new rules to a wider range of banks.

Institutions with at least $100 billion in assets might have to comply, effectively lowering an existing $250 billion threshold for which regulators have reserved their toughest rules.

Critics in the banking industry say a relatively large increase in bank-capital requirements could raise costs for consumers and lead banks to stop offering certain services.

“Higher capital requirements are unwarranted," said Kevin Fromer, the CEO of the Financial Services Forum, which represents the largest U.S. banks. “Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time."

They also say the proposal could punish banks for relatively benign services that revolve around fee income. The new rules are expected to treat fee-based activities as an operational risk, a category that includes the potential to lose money from flawed internal processes, people and systems or from external threats such as cyberattacks.

The framework for calculating operational risk charges “would disproportionately and inappropriately" increase capital requirements for firms focused on fee-generating activities, said Katie Collard, senior vice president and associate general counsel at industry group Bank Policy Institute.

That could include banks with large wealth-management businesses, such as Morgan Stanley as well as American Express, which owns a credit-card network that generates swipe-fee income, people familiar with the proposal said.

“The strength and breadth of the U.S. financial system requires a tailored approach to capital standards," said Andrew Johnson, a spokesman for American Express, adding that regulators should take the size and business models of different banks into account when writing rules.

A spokesman for Morgan Stanley declined to comment.

While the largest U.S. banks emerged from the pandemic in solid financial shape, Federal Reserve Vice Chair for Supervision Michael Barr has signaled he believes capital requirements should be higher. “The banking system might need additional capital to be more resilient precisely because we don’t know the nature of the kinds of ways we might experience shocks to the system, as has happened with these recent bank failures," he told House lawmakers in May.

The coming proposal is the last piece of capital rules that global policy makers agreed to implement after the 2007-09 financial crisis. The overhaul forced banks around the world to boost their capital cushions in hopes of making them better prepared to weather downturns without taxpayer bailouts.

Banks must have loss-absorbing buffers to account for the risks tied to their activities, but regulators believe the way some firms currently measure these risks varies too widely. The last step of the global overhaul is aimed at making measures of riskiness more transparent and comparable around the world.

The new framework was completed in 2017, but efforts to implement it in the U.S. were delayed by the pandemic. The Fed is playing a leading role in crafting the measure, along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

All three agencies are expected to seek comment on the proposed capital rules. They would have to vote again to complete the changes, likely implementing them over the coming years.

They are also expected to propose ending a regulatory reprieve that had allowed some midsize banks to effectively mask losses on securities they hold, a contributing factor in the collapse of SVB. Supporters of the change say it would have forced SVB to address the issue earlier as interest rates began rising and the value of its holdings declined.

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