Fed approves US bank reform proposals after officials express scepticism

New rules under 'Basel Endgame III' proposal would raise capital requirements by 16% for large banks

US bank regulators approved reform proposals after the collapse of Silicon Valley Bank brought fears of a global financial crisis. Reuters
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The Federal Reserve on Thursday voted to approve two proposals to implement sweeping changes to the US banking system after the collapse of three lenders this year brought fears of a new financial crisis.

The two proposals would increase capital requirements of 16 per cent – on average – for banks with more than $100 million in assets.

The proposed rules would also implement changes as to how these large banks manage risk.

The changes were approved in a 4-2 vote. Fed chairman Jerome Powell, who voted in favour, said raising banking capital without reducing activity was a “difficult balance to strike”.

“Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary,” Mr Powell said during a public meeting.

They are the first to be debated since the failure of Silicon Valley Bank and two other medium-sized lenders thrust the banking sector into crisis.

Before the vote, two Fed governors expressed apprehension with the proposals.

Michelle Bowman said raising capital requirements would put unnecessary stress on the banking system and customers.

“While there is more to learn about the recent bank failures, it seems apparent that these failures were caused primarily by poor risk management and deficient supervision, not by a lack of capital,” Ms Bowman said in prepared remarks.

“Ultimately, bank customers will bear the cost of these capital requirement increases.”

Governor Christopher Waller said: “We must recognise that, at some point, well-intended actions to improve financial resiliency can undermine the indispensable role banks play in providing financial intermediation.”

The reforms were part of the “Basel Endgame III” proposal, which was agreed to after the 2008 global financial crisis to ensure it did not happen again.

The two proposals were put forward before this year's banking turmoil.

The Federal Deposit Insurance Corporation approved the proposal earlier on Thursday.

The two proposals now enter a 120-day period for public comment, after which the two regulators will vote to finalise them.

Updated: July 27, 2023, 7:40 PM