Barr says ‘material changes’ warranted to bank capital requirement proposals

Vice Chair for Supervision Michael Barr stated in a speech to be presented at the Brookings Institution on “The Next Steps on Capital,” according to summary posted on the Federal Reserve website: “Since I joined the Federal Reserve Board as Vice Chair for Supervision, I have spoken many times about the importance of bank capital to the safety and soundness of banks and the stability of the financial system. It is critical that banks have the capacity to continue lending to households and businesses through times of stress. Bank capital is a key component of this resilience. And bank capital rules help to ensure that banks are holding capital commensurate with the risks of their activities and the risks that they pose to the U.S. financial system. But capital has costs too. As compared to debt, capital is a more expensive source of funding to the bank. Thus, higher capital requirements can raise the cost of funding to a bank, and the bank can pass higher costs on to households, businesses, and clients engaged in a range of financial activities. These activities are critical to a well-functioning economy that works for everyone. That’s why it is important to get the balance between resiliency and efficiency right. Today, I’ll return to these themes in the context of two rules of great public interest: The Basel III endgame proposal and the proposal to adjust the capital surcharge for global systemically important banks – G-SIB. A little over a year ago, the Board sought comment on those two proposed rules, which would modify risk-based capital requirements for large banks. We received a great number of comments on the provisions in the proposal, as well as on the justifications and analysis that underlie those provisions. Since that time, we have been hard at work analyzing the comments and the data we collected to evaluate the combined impact of these proposals. We have spoken with a wide range of stakeholders, including banks, academics, public interest groups, consumers, businesses, other regulators, Congress, and others. As you would expect in a project as technical and consequential as this one, I have had many productive meetings with Board colleagues and our fellow federal bank regulatory agencies, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. This process has led us to conclude that broad and material changes to the proposals are warranted. As I said, there are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received. The changes to the endgame proposal have been a joint effort with my counterparts at the FDIC and the OCC. I intend to recommend that the Board re-propose the Basel endgame and G-SIB surcharge rules. This will provide the public the opportunity to fully review a number of key broad and material changes to the original proposals and provide comment. We will accept public comments on any aspect of the Basel endgame and G-SIB surcharge proposals.” Publicly traded large banks include Bank of America (BAC), Citi (C), Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS), U.S. Bancorp (USB) and Wells Fargo (WFC).