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Do Regulators Change Their Minds?
A significant shift occurred this week. The Federal Reserve’s Vice Chair for Supervision, Michael Barr, announced the Fed would re-propose capital rules for the largest banks, adjusting for feedback heard in the rulemaking process.
The Fed, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., first proposed more stringent capital rules for the largest banks over a year ago. Faced with industry pushback and feedback from other regulators, Barr said the agency would scrap the old proposal and come up with a new one. Under the re-proposal, global systemically important banks would see their common equity Tier 1 capital requirements increase by 9%, half of the earlier proposal. Barr also said that in comparison to the prior proposal, he will recommend reducing risk weights tied to mortgages, fee income and derivatives. Meanwhile, midsized banks from $100 billion to $250 billion in assets would have to count unrealized gains and losses in the securities portfolio toward regulatory capital, resulting in an estimated 3% to 4% in additional capital required.
The industry had argued that more onerous capital standards would reduce lending to borrowers of all kinds. “In all of our work, we will continue to seek an approach that helps to ensure financial system resiliency and supports the flow of credit to households and businesses,” Barr said.
Bart Smith, a presenter at Bank Director’s Bank Board Training Forum, which starts with pre-conference events tomorrow in Nashville, says regulators certainly can change their minds. Disagreements about capital can be one of the key “relationship killers” when it comes to banks and their regulators, he says.
For example, finding out during an exam that regulators want more capital can be a painful and discouraging experience. Capital is more expensive than debt for banks, as Barr noted in a speech this week. Capital is a bulwark against losses, but the more a bank retains, the lower its profits.
Smith suggests banks carefully assess their risks and articulate to regulators how they are addressing those risks to avoid disagreements over capital needs. “The more you can identify your risk,” he says, “the more you are in control of your capital.”
Regulators can and do change their minds — especially when banks make their voices heard.
• Naomi Snyder, editor-in-chief for Bank Director
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