(Washington) The American Federal Reserve (Fed) wants to impose on medium-sized banks a higher level of capital to avoid new bankruptcies and a destabilization of the sector, like the crisis in the spring, indicated Monday its deputy President Michael Barr.
In absolute terms, the banking sector is supposed to apply the so-called Basel III rules, a set of proposals notably imposing minimum capital requirements in order to avoid, as during the 2008 financial crisis, that governments are forced to steal to the aid of establishments threatened with bankruptcy.
But the United States has chosen to impose these rules only on its major brands, with more than 700 billion dollars in assets or carrying out part of their activity abroad.
The fall of Silicon Valley Bank (SVB) in March and the turmoil in the sector, along with the fall of other regional institutions, prompted US regulators to review their approach.
“I will recommend that the enhanced capital rules apply to banks with $100 billion in assets or more. […] This implies that more establishments will be affected than under the current framework,” Mr. Barr detailed in a speech in Washington.
The Fed’s proposals are not expected to go into effect for “at least several years from now,” after public consultation and a transitional compliance phase.
In practice, these institutions will have to have an additional 2 percentage points of their assets in equity, in order to be able to cope with possible shocks.
“Our experience shows that even a bank of this size can cause stress that could spill over to other institutions and challenge financial stability,” Barr said, noting that the lack of liquidity was the one of the causes of the fall of SVB.
The central bank believes that as it stands, “most banks already have enough capital to meet these new requirements,” the official explained.
According to him, the others will be able to fill them “in less than two years, while paying their dividends”.
A regional bank specializing in deposits for companies in the tech sector, SVB was put in difficulty in March by the rise in Fed rates which resulted in a devaluation of part of its assets when it was supposed to cope with a massive outflow of capital.
The American financial sector then experienced several weeks of tension, marked by the fall of regional establishments such as Signature and First Republic.
The Fed, along with the Treasury Department, have since sought to reassure markets, saying the US financial sector was “strong and resilient.”
But, Barr pointed out, every major bank has its own internal credit risk assessment model and they tend to “underestimate” it. He therefore pleads for a “standardized approach”, which would also make it easier for medium-sized banks.
The American Banking Federation (ABA) said it was disappointed with Mr. Barr’s “determination” to want to strengthen banks’ capital despite “the evidence of their good capitalization”.
According to the ABA, the Fed “does not sufficiently appreciate the negative consequences” of requiring banks to increase their capital, saying that it would have a “cost to the economy”.
“We are ready to oppose any reform that will affect the economy and that will not be necessary to maintain the safety and soundness of the banking system,” she warned.
These proposals could be the subject of some opposition within the Fed council itself. Michelle Bowman has already spoken out against the idea of new supervisory rules without an “impartial and independent investigation” into the causes of the turbulence in the banking sector.
“We have to be careful about what went wrong,” Bowman said in late June. “A misperception and misunderstanding of the root causes” of these bankruptcies could have “negative effects on banks and their customers.”
For Michael Barr, these comments are “a reminder that each board member makes their own choices about whether or not to vote on a proposal, and I respect that.”
Another proposed measure is to increase the proportion of banks’ long-term debt, which should “improve a bank’s ability to cope with difficulties, because long-term debt can be converted into equity and thus be used to absorb any “losses,” Barr said.
The vice-president of the Fed also suggested reviewing the conditions of the stress tests, which make it possible to regularly check the sector’s ability to withstand different crisis scenarios.