With The Federal Reserve Leading the Way, Larger US Banks Could Be Facing as Much As 20% Increase in Capital Requirements

US regulators already had plans to implement stricter regulations on banks who are the biggest lenders at the beginning of this year, but in wake of the Silicon Valley Bank failure in March, the plan has altered to now include a wider range of financial institutions. The new plan is expected to be announced at the end of June, which is likely to include higher requirements for capital, liquid assets banks must hold as a buffer to help absorb losses, the Wall Street Journal reported earlier this month.

Three US agencies, The Fed, Federal Deposit Insurance Corp, and the Office of the Comptroller of the Currency, have been moving to regulateUS banks in an effort to achieve global harmony in capital requirements. Part of the goal is to be compliant with Basel Committee’s global bank capital rules that will go into effect in 2025. Randal Quarles, the Fed’s previous top regulatory officer, intimated in a speech back in 2021 that compliance with these requirements could lead to as much as an average of 20% capital increases for large banks.

These impending changes are expected to especially impact those financial institutions that particularly rely on fee-based income or have big trading businesses. Part of these potential new regulations is expected to include ways to guarantee that supervisors are being tougher while regulating lenders. While the goal is certainly to go after mega banks, there are many larger regional banks that could be facing rule changes as well. It is expected that institutions with at least $100 billion in assets would be subject to these stricter regulations, much lower than the previous threshold of $250billion.

As expected there has been significant backlash to these imposing changes, with many in the banking industry, particularly the Financial Services Forum who represents the US’s largest banks, saying that a boost to capital requirements could end up increasing costs for businesses and those looking to take out a loan, and may even make it difficult for banks to offer certain services. There are many that believe small businesses in particular could be greatly impacted, as 31% of small businesses in the US bank at either one the larger institutions or at one of the country’s large regional banks.

According to Kevin Fromer, CEO of the Financial Services Forum, these regulatory changes “would raise the costs of lending for families and businesses, hinder U.S. economic growth, and further push activity outside of the regulated financial sector. Regulators must carefully consider the economic impact of capital requirements, because they affect the whole economy, not just banks.”