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The Federal Reserve has this week announced it will scale back plans to increase the level of capital the largest US banks are required to have to cover potential losses, following criticism from the industry.
Michael Barr, the US central bank’s top regulator, said it planned to impose a 9 per cent rise in capital requirements on the biggest lenders, down from the 19 per cent proposed last summer. This brings it closer to the proposed increase for banks in the EU, forecast to be 9.9%.
The revisions to the so-called Basel III Endgame rules are welcomed by banks, who argued that the original rise proposed would harm the economy and set the US banking industry back against international rivals.
While banks have long been required to have a certain level of capital, the proposal relates to so-called “operational” risks, like the ones that felled Silicon Valley Bank and other US regional banks last year.
US regulators are likely to require some extra capital to cover operational risk, but how much is too much? Higher capital requirements are safer with regards to regular financial crises, but could discourage people and banks from lending, hampering economic growth.
And things have changed since the financial crisis; Lehman Brothers and other financial firms that ran into trouble in 2007-2008 had capital levels of about 3 per cent of their total assets. Today’s large US banks have capital levels that are around 10 per cent.
So what do you think: should US banks have much higher capital requirements? Tell us your view by voting in our poll or commenting below the line.
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