The Federal Reserve’s top regulatory cop previewed changes Thursday to key capital requirements for banks that would reduce their cash cushions by a small amount while still keeping them above the levels set in 2019.
It’s a move intended to boost lending while still protecting the strength of the banking system.
Fed Vice Chair of Supervision Michelle Bowman, who is expected to roll out a formal proposed regulatory framework on what is known as Basel III next week, said it will result in a small increase in requirements for the largest US banks — similar to levels required in the UK — but that a capital surcharge applied to the biggest banks like JPMorgan Chase and Goldman Sachs would drop. The reasoning, she said, is that the increases were higher than the risk banks were taking on.
Together, both changes would decrease the cash cushion the Fed requires banks to hold by a “small amount.”
“Continuously increasing capital levels without a specific purpose imposes real economic cost,” Bowman said in a speech at the Cato Institute in Washington, D.C. “When capital requirements become excessive, they impair the banking system’s fundamental function of providing credit to the real economy. The price is paid in forgone economic growth, reduced job creation, and lower standards of living.”
Bowman said the changes to the capital framework are designed to eliminate overlapping requirements, rework calibrations to match actual risk, and address longstanding gaps in regulators’ oversight.
“The result is more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness,” she said.
Right now, banks are required to use two different calculations to show they’re in compliance with capital requirements, which is fairly burdensome. The proposal would slim this down so banks only have to use a single method for calculating their compliance with requirements.
The proposal also increases the capital banks hold against their trading activities. Bowman said the new method would better capture losses under market stress and better account for less liquid positions. It introduces a standardized calculation that applies consistently across firms while reducing the burden for banks with simpler trading activities.
The changes are also aimed at jump-starting mortgage lending at banks, which has migrated heavily to nonbanks.
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Those changes include removing any requirement for a bank to deduct mortgage servicing assets from regulatory capital. Instead, Bowman would assign a 250% risk weight to these assets that banks, in turn, would need to have capital to cover any losses on those mortgages. Bowman said she thinks that incentivizes banks to issue and service mortgages and mitigate the migration of mortgage activity to nonbanks over the past 15 years.
