Fed Official Defends Basel Endgame Proposal to Strengthen Financial System
Fed Vice Chair for Supervision, Michael Barr, champions “Basel Endgame” proposal
Fed Vice Chair for Supervision, Michael Barr, defended the “Basel Endgame” proposal at the American Bankers Association conference on Monday. The proposal aims to modify the calculation of capital reserves for banks in order to enhance the financial system’s resilience against potential losses. These changes align with international standards set by the Basel Committee on Banking Supervision, which were introduced following the global financial crisis of 2007-2009.
Strengthening capital requirements for banks
Barr argued that bolstering capital requirements for large banks would improve the financial system’s ability to withstand unexpected stress. He emphasized that this would not negatively impact lenders’ profitability or long-term market value. According to Barr, the increase in capital requirements related to lending comprises only a small portion of overall capital augmentation, resulting in a marginal rise in funding costs of up to 3 basis points. He attributed this increase primarily to trading and other operations that have historically led to substantial losses.
Addressing concerns and emphasizing the need for resilience
While the banking sector has expressed concerns about the proposal’s potential effects on mortgage borrowers, green project financing, and the broader economy, Barr maintains that strong capital reserves are vital for banks to weather economic downturns and unforeseen risks. He highlighted the recent failure of Silicon Valley Bank as evidence of the necessity for reinforcing the system.
Insights into Silicon Valley Bank’s challenges
Considering Silicon Valley Bank’s recent struggles, it’s worth noting some insights from InvestingPro. The bank, known by its ticker SLAB, has experienced significant financial setbacks. Over the past three months, SLAB has seen a substantial drop in its price (-25.59%), which further declined over the last six months (-31.44%). This indicates a notable loss of investor confidence.
Additionally, InvestingPro Tips indicate that analysts anticipate a decline in SLAB’s sales this year, and its revenue growth has recently slowed down. It’s important to mention that the bank does not pay dividends to shareholders, which may make it less attractive to some investors. However, SLAB maintains a strong financial position, with more cash than debt on its balance sheet, and its liquid assets exceed short-term obligations.
Fed Chair Powell’s support and willingness to listen
Fed Chair Jerome Powell has expressed support for the Basel Endgame proposal while also demonstrating a willingness to listen to feedback and concerns. Isaac Boltansky of BTIG considers this situation as a test of Barr’s policymaking freedom in his supervisory role.
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