scorecardAfter the turmoil in regional banks, here comes new regulation
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After the turmoil in regional banks, here comes new regulation

Jeffrey Cane   

After the turmoil in regional banks, here comes new regulation
Finance2 min read
  • Biggest US banks could see 20% boost in capital requirements, Wall Street Journal reports.
  • Banks with trading businesses or that are dependent on fees could take the biggest hits.

    Midsize regional banks underwent extreme stress earlier this year, with First Republic and two others failing, yet the biggest banks in the US may be the ones hit with tougher regulatory rules.

    The biggest banks could see, on average, a 20% rise in their capital requirements, The Wall Street Journal reported, citing unidentified people familiar with the plans.

    The proposals are expected as soon as this month and will vary based on the bank's businesses, according to the Journal. Banks with large trading businesses – like JPMorgan Chase or Goldman Sachs – are likely to be hit with the sharpest increases.

    "Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases," the Journal reported. Morgan Stanley could be among those affected as a result.

    For a bank, capital is a buffer in the event of losses. Capital is "the difference between all of a firm's assets and its liabilities," according to the Federal Reserve. After the financial crisis of 2007-2008, regulators worldwide sought to bolster banks' capital requirements.

    And while the new capital proposals come during a time of turmoil for some banks, they are actually a product of a process begun in the wake of the last financial crisis. The regulatory framework of central bankers from major countries first published the standards known as Basel III in 2010. Banks have long been waiting for details of the new capital requirements.

    Critics say that boosting capital will further restrict credit at a time when higher interest rates are already making borrowing more expensive and difficult to obtain. And the recent turmoil in the US regional banks only underscored the current strength of the mega banks, suggesting that the focus on increasing capital at the biggest institutions was misplaced.

    Among the sharpest critics of the coming rules has been Jamie Dimon, the chief executive of JPMorgan. In testimony before the Senate Banking Committee in September, he said:

    "The continued upward trajectory of regulatory capital requirements on America's already fortified largest banks, particularly when not reflective of actual risk, is itself becoming a significant economic risk, because unrepresentative capital requirements erode banks' ability to meet customer needs….

    This is bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions. It is bad for consumers, as it forces banks to do illogical things like reducing mortgage exposure in order to drive down assets."

    Citigroup's chief executive Jane Fraser also warned that increasing capital requirements for banks could lead to more companies turning to non-bank lenders like private credit players during the bank's first-quarter earnings call. She said:

    What continues to keep me most awake at night is the quantity and quality of activity in the shadow banking industry. It does not benefit from the same regulatory frameworks and protections for participants. And I, amongst others, fear that more activity getting driven into it, if the banking capital requirements increase, will be through the detriment of system strength and stability.