Washington, D.C. — Bank regulatory frameworks foster a safe and sound financial system, enabling banks to continue serving U.S. businesses and households, even amid periods of economic stress. Following the failure of Silicon Valley Bank (SVB) and other financial institutions in March 2023, the regulatory standards that underpin the nation’s banks were placed under scrutiny. The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency issued proposals in July 2023 to make improvements to how risk is assessed and increase the overall level of capital large banks would have to maintain. Yet a new Center for American Progress analysis finds that these proposals are too modest to substantially enhance banks’ stability and must go much further to enhance the stability of the largest banks.
The agency proposals to amend risk-based capital requirements for banks with more than $100 billion in total assets make important changes, such as reducing firms’ reliance on internal models for calculating market and operational risks and requiring banks to include gains or losses on available-for-sale securities when calculating regulatory capital. However, this new CAP analysis gauged the effects of the capital proposals on aggregate common equity Tier 1 (CET1) capital of the eight most systemically important U.S. banks, finding that significantly higher levels of bank equity are needed to address bank fragility.
“Although the risk of runs at large regional banks has receded, there is evidence that some of them are still experiencing stress. If regulators want to create true financial stability, these proposals are just the first step toward bank stability,” said Marc Jarsulic, chief economist and senior fellow at CAP and co-author of the column. “While finalizing their proposals, regulators should consider further increases to bank equity to create a safer and more resilient banking sector.”
Read the column: “Regulators’ Bank Capital Proposals Don’t Go Far Enough To Improve Financial Stability” by Marc Jarsulic and Lilith Fellowes-Granda.
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