US considers tougher capital requirements for midsized lenders after collapse of Silicon Valley Bank

The United States is considering tightening capital requirements for medium-sized banks. The US financial authorities are planning to implement a package of measures aimed at ensuring that entities with more than $100 billion in assets have a sufficient liquidity cushion to face a possible crisis. This is an issue that has been at the center of the debate after the collapse of Silicon Valley Bank last March shook the U.S. financial system.

The Federal Reserve’s top banking regulator, Michael Barr, said he wants Wall Street banks to start using a standardized approach for assessing credit, operational and trading risks, rather than relying on their own estimates. “The proposed rules would end the practice of relying on banks’ own individual estimates of their own risk and instead use a more transparent and consistent approach,” Barr said of his plans.

Barr explained that after conducting an exhaustive months-long review of the capital levels available to the industry, the authorities have concluded that the current system is sound overall, but a number of changes are needed that would involve requiring additional capital levels from banks to protect against potential future losses. “These changes would increase capital requirements overall, but I want to emphasize that they would primarily increase capital requirements for the largest and most complex banks,” he said.

These measures would apply to banks with more than $100 billion in assets. This would mean extending the requirements to the sector, which until now only applied to banks that operate globally or have $700 billion in assets.

According to Bloomberg, an initial plan could be published as early as this month, but it is likely that the actual changes will not come into effect for months or years. Similarly, the banking industry will also have a chance to have its say. “We intend to consider the comments carefully and any changes would be implemented with an appropriate phase-in,” Barr noted. In addition, the Fed’s Vice Chairman for Supervision has pointed out that most banks already have sufficient capital to meet the new requirements.

Since taking office last year, Barr has been reviewing banks’ capital requirements in order to introduce regulations in line with Basel III, the rules developed in Europe in response to the financial crisis that began in 2008. In fact, capital requirements and supervision levels for banks in the United States have been in the spotlight since the collapse of Silicon Valley Bank last March.

In 2018, the U.S. decided to raise the category of systemic bank when an entity had $250 billion in assets (previously that limit was set at $50 billion). This is a key issue, as systemic banks are subject to much more stringent supervision and capital requirements than smaller institutions. Following the failure of SVB and the turmoil in the financial sector in the weeks that followed, a debate arose to expand the perimeter of systemic banks in order to tighten oversight and set more stringent capital requirements to enable institutions to absorb potential losses in the event of a financial crisis.

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