Future Resilience vs. Global Competitiveness: A Close Examination of Proposed U.S. Banking Rules

The U.S. banking sector stands on the precipice of significant change as regulators propose raising capital levels for large financial institutions. These proposals aim to fortify against future financial crises and maintain the sector's stability. However, while designed to bolster the resilience of banks, there are concerns about their potential impact on competition and the wider economy.

Proposed Changes and Their Implications

The regulators' proposal will require banks with at least $100 billion in assets to increase their capital levels. This group, numbering around 30, includes industry giants such as JPMorgan Chase and Bank of America, as well as mid-sized regional banks like Fifth Third and Regions. The rules would also affect banks with $100-$250 million in assets, mandating an average capital increase of 5%.

Regulators contend that these measures are vital to strengthen lenders, improving their resilience and preparedness for shocks similar to the spring crisis triggered by failures of Silicon Valley Bank, Signature Bank, and First Republic. The changes aim to safeguard the banking system from stress and maintain public confidence, as acting Comptroller of the Currency Michael Hsu has indicated.

Skepticism within the Fed

The proposed changes, however, have met with skepticism within the Federal Reserve. There is worry about the potential costs of the capital increases and their possible impact on capital markets and operational risk. Fed governors Christopher Waller and Michelle Bowman have expressed doubts about the proposal, suggesting that it could disadvantage U.S. banks in international competition, impair lending and liquidity in markets, and force smaller banks to merge, which would impact competition adversely.

Basel III and the Banking Industry's Response

The proposed changes form part of the U.S. version of the Basel III accord, an international agreement developed by the Basel Committee on Banking Supervision to establish global regulatory capital standards. The banking industry has pushed back against these rules, arguing that they are now more resilient than they were during the 2008 financial crisis and that higher capital requirements could constrain lending.

New Risk Assessment Measures

A key aspect of the new rules is the introduction of higher "risk weights" for certain assets held by banks, requiring them to set aside more capital for riskier assets. Additionally, regulators plan to enforce uniform standards, disallowing banks from using internal models to estimate potential loan losses.

Another significant shift is that banks with assets worth $100 billion or more will need to account for unrealized losses on available-for-sale securities against their regulatory capital. This marks a reversal from a previous policy that allowed small and mid-sized banks to exclude these paper losses from regulatory capital levels.

Global Competitiveness Concerns

As Bank of America CEO Brian Moynihan warns, the proposed changes might bring about stronger resilience for U.S. banks, but they could also impede the ability of these institutions to compete globally. Implementing these rules must be done in a way that doesn't unintentionally weaken U.S. competitiveness, putting mid-sized banks at a disadvantage when competing for middle-market loans against international rivals operating with a lower cost of capital.

Conclusion

Striking a balance between ensuring financial stability and maintaining competitiveness is a challenging task that calls for cautious deliberation and an understanding of the potential repercussions. The proposal will be open for public comment until Nov. 30, and some parts will be phased in from July 2025. By July 2028, all rules are expected to be in place. As we progress with these monumental changes, the priority should be not just to prevent future financial crises, but also to ensure the sustained growth and competitiveness of the U.S. banking industry in the global landscape. The outcome of this critical dialogue is eagerly awaited by the industry.

Sources:
Marketwatch

Yahoo Finance