Fed proposes easing capital rules for major banks
00:00 Julie
The Federal Reserve has come out with a long-awaited proposal to rewrite capital rules; potentially freeing up billions of dollars for lending, share buybacks and dividends for big banks. Joining us for more is Yahoo Finance Fed reporter Jennifer Schonberger. So Jennifer, what will we learn?
00:20 Jennifer Schonberger
Hello Julie. Good morning. This is true. The Fed’s long-awaited new proposal would make adjustments to financial crisis-era capital requirements, reduce banks’ cash cushions to readjust to the economy and aim to increase lending. This is the long-awaited Basel three requirements, which were supposed to emerge after the 2008 financial crisis to comply with international capital standards, but have also been adapted for US banks. It has gone through numerous iterations since then. It also includes changes to stress tests and a capital surcharge for the largest US banks. And based on these combined proposals on the net, the largest US banks would see their capital cushions, or capital requirements, fall by 4.8%. These are banks like JP Morgan and Goldman Sachs. The capital requirements of the next tranche of banks, with assets between 700 billion and 100 billion, are projected to fall by 5.2%. And then smaller banks with assets of 100 billion or less will see their capital requirements fall by 7.8%. Yet even with these reductions in capital requirements, the largest banks in the U.S. will still have more than $800 billion to hedge against any losses in the event of a recession or financial crisis. And capital levels would still be twice what they were before the financial crisis. Now, the Federal Reserve’s top cop who spearheaded these changes, vice president for supervision Michelle Bowman, said: Look, you know, when regulators enacted these regulations after the financial crisis in 2008, they were well-intentioned, but they also had unintended consequences. And today’s rules are really aimed at recalibrating so that we’re seeing loans that are inadvertently going to the non-bank sector, meaning mortgage loans and some commercial loans, trying to bring that back into the purview of regulators, into the traditional banking sector of the bank. Not everyone agrees with today’s proposal. Not surprisingly, Fed Governor Michael Barr objects to this. Oh, of course, before Michelle Bowman, she was vice president of audit and was known for putting forward a very stringent capital requirement proposal for Basel 3. He called it unnecessary and unreasonable. He said this would undermine the resilience of banks in the U.S. financial system.
03:49 Julie
So what does this mean for banks?
03:53 Jennifer Schonberger
Look, I think clearly it doesn’t change their calibration too much in terms of the capital they need to hold, but what it does do is simplify the calculations. Now instead of doing two calculations, they have to do one. So it’s less burdensome for them. This is less costly for them. This frees up cash and capital that they can start lending to the economy. Therefore, I expect loans to increase as a result. I haven’t talked to the banks yet, but we’ll see what their reaction is.
