Basel revamp to increase capital requirements by 9%: Barr of Fed

Federal Reserve Vice Chairman Michael Barr, changes were revealed on Tuesday to the proposed Basel regulations which, if approved, would about halve the amount of additional capital that large banks would be required to hold.

Initial proposal, introduced in July 2023would increase capital requirements for global systemically important banks by about 19%.

However, Barr said Tuesday that the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have changed the proposal and will resubmit it, increasing capital requirements for those banks by about 9%.

G-SIBs aren’t the only banks that will see an easier time getting out of Tuesday’s proposed requirements. Large banks with $250 billion or more in assets would have to hold 3% to 4% more capital under the revised proposal. That’s down from the additional 6% they would have been required to hold under last year’s proposal. Banks with $100 billion to $250 billion in assets would face a 0.5% increase in capital requirements under the revised proposal, down from 6% last year.

“Bank capital is a key part of (the banking sector’s) resilience … but capital also has its costs,” he said in prepared remarks ahead of a news conference performance at the Brookings Institution.

“Compared to debt, equity is a more expensive source of funding for a bank. So higher capital requirements can make funding more expensive for a bank, and a bank can pass on higher costs to households, businesses and customers engaged in a range of financial activities,” Barr said. “These activities are essential to a well-functioning economy that works for everyone. So it’s important to get the balance right between resilience and efficiency.”

Barr said Tuesday that the plans are not yet set in stone and that regulators “have not made final decisions on any aspect of the reproposals, including those not expressly addressed in the reproposal.”

“This is an interim step. Let me reiterate that we welcome comments on any aspect of the proposal,” he said.

When asked about the timeline at the Brookings event, Barr said that whenever the rule is finalized, banks will have a year to begin implementing it. Barr said the November presidential election will have no impact on the rule.

“I see my job at the Federal Reserve as not paying attention to elections,” he said. “I have a set term. I just do my job.”

Barr’s term at the Fed ends in 2026.

Last summer’s version of the proposal drew the ire of CEOs from major banks, such as Jamie Dimon, CEO of JPMorgan Chase, who called more stringent capital requirements “faulty and poorly calibrated.”

Even some regulators, such as the FDIC Jonathan McKernan AND Travis Hillhas spoken out against the Basel proposal in its current form. And Federal Reserve Chairman Jerome Powell, in testimony on Capitol Hill in March, said he expected “broad” and “material” changes to the proposal.

“The journey to improve capital requirements since (the 2008 financial crisis) has been a long one, and the end of Basel III is an important part of that effort,” Barr said Tuesday. “These renewed proposals bring us closer to completing the task.”

The Fed is examining how the stress tests complement the proposed rules, Barr said, adding that the regulator will continue to “seek approaches that help ensure the resilience of the financial system and support the flow of credit to households and businesses.”

“We have to do this right,” he said.