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Gold-Plated Capital
The fight over how much capital is enough, or too much, is as endless as banking regulation itself. To oversimply, the more capital you have, the more strength you have against losses. The less capital you have, the more you can lend out. It also means you earn more and can pay shareholders more in the form of dividends and stock buybacks.
In the last few years, battles over capital have been epic. Michael Barr, who served as the Federal Reserve’s vice chair for supervision under President Joe Biden, led a charge to institute new capital standards to conform to the international standard known as Basel III. Those would have dramatically increased capital requirements for the largest banks, by as much as 20%, according to the Bank Policy Institute. Much of that was due to the proposed risk-weighting of assets, which critics said would create a “gold plating” standard that went beyond what Basel III suggested. That proposal was never finalized.
On March 19, the three federal prudential banking regulators under President Donald Trump’s administration issued a new, joint capital proposal. Instead of increasing capital standards, it would cut back on capital requirements across the banking industry, including for banks below $100 billion in assets. “The proposals represent the most significant proposed recalibration of the U.S. bank capital framework since the post-crisis reforms,” attorneys from Freshfields wrote in a blog post. “With comments due in June, the industry has a narrow window to shape rules that could define the capital landscape for years to come.”
Fed Governor Barr said in a statement that the proposal includes many provisions he has supported in the past. But he’s opposed to the new rules. When combined with changes to the enhanced supplementary leverage ratio, he said they would cut Tier 1 capital at the largest banks by 6%, or $60 billion, which he called “unnecessary and unwise.”
Rodney Hood, the former acting comptroller of the currency who served a five-month term until Jonathan Gould was confirmed, said the proposal reflects a promise made last year. That’s when he and a group of other U.S. banking regulators met in Basel, Switzerland, with the oversight body for the Basel committee. “We were clear,” he says. “The United States will uphold strong and globally credible capital standards, but we will not implement Basel III in a way that weakens the strength or competitiveness of our banking system.”
• Naomi Snyder, editor-in-chief for Bank Director
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