Federal regulators proposed a plan on Thursday to lower the capital requirements for large and regional banks. While supporters believe the move will cut bureaucracy and stimulate lending, critics warn it could make the banking system more vulnerable to collapse. The proposal would allow banks to hold billions of dollars less in reserve for potential losses.
These rules were originally established to prevent a repeat of the 2007 financial crisis. In the years following the Great Recession, major banks doubled their capital levels, adding $1 trillion in buffers to withstand economic shocks.
After years of industry lobbying, regulators now state that the financial system is stable enough to safely ease these restrictions.
The New York Times wrote the following:
“The proposals would alter rules imposed in the aftermath of the financial crisis that sparked the Great Recession in 2007. Since then, large banks more than doubled their capital levels, adding $1 trillion to the buffers intended to help them withstand shocks and downturns.
Banks have for years lobbied to have requirements loosened, and regulators said they agreed that it was now safe to make adjustments.”
Following the proposal’s release, Federal Reserve Jerome H. Powell stated, “It has been almost two decades since the crisis, and over the years we have come to understand that certain elements of the post-crisis regulatory regime may warrant recalibration,” Jerome H. Powell, the chair of the Federal Reserve, said Thursday.
The board voted, 6 to 1, in favor of the proposed overhauls.
The changes come amid a broader push by the Trump administration — led by Michelle W. Bowman, the Fed’s vice chair of supervision — to slash banking regulation and oversight. Last year, the Fed proposed changes to the stress test exams that big banks take annually, making them more bank friendly. The Fed also plans to cut its supervision staff by 30 percent.
The proposed capital requirements drew only one dissent, from the Fed governor Michael Barr. He called the capital requirement reductions “unnecessary and unwise.”
Mr. Barr, who was replaced as vice chair for supervision after President Trump took office, said he supported some of the suggested technical tweaks but had significant concerns about alterations to proposed rules for the adoption of an international regulatory framework known as Basel III.
Allowing a “much weaker” version of those rules in the United States “could trigger a ‘race to the bottom’ on standards, harming the global financial system,” he said.
Regional banks in particular stand to benefit from the revised requirements, which will free up capital for lending, or for share buybacks and dividends. Such banks can play an especially vital role in providing credit for local businesses and commercial development.
But they can also pose outsize risks. Three years ago this month, the collapse of Silicon Valley Bank, a tech industry lender, set off a crisis of confidence that spotlighted solvency issues across the regional banking sector. Within days, two more banks failed.