Federal Reserve Official Defends Proposal to Increase Bank Capital
Benefits of Higher Capital Outweigh Costs, Says Fed Vice Chair for Supervision
The U.S. Federal Reserve’s top regulatory official, Michael Barr, has defended a comprehensive proposal to overhaul bank capital rules. Speaking before the country’s largest bank lobby, Barr argued that the benefits of a larger capital cushion outweigh any additional costs banks might face. He emphasized that the proposal, known as the “Basel Endgame,” should have a limited impact on banks’ lending costs, with the focus primarily on other activities such as trading.
International Standards Aimed at Strengthening Financial System
The proposal implements international capital standards agreed upon by the Basel Committee on Banking Supervision in response to the 2007-2009 financial crisis. Since its release in July, banks have expressed strong opposition, fearing negative effects on mortgage borrowers, lending to green projects, and the broader economy. However, Barr stressed that higher capital for lenders is crucial in creating a healthier and more resilient financial system.
Addressing Concerns Over Lending and Economic Impact
In his speech, Barr addressed industry concerns that higher capital costs for banks would lead to reduced lending and potential economic harm. He highlighted that similar warnings were made when tougher rules were imposed in the aftermath of the financial crisis. Despite these concerns, the U.S. banking system has remained vibrant, and the economy has continued to grow. Barr emphasized that strong capital ensures lenders can weather downturns and unexpected risks.
Fed Chair’s Support and Call for Feedback
Fed Chair Jerome Powell voted to propose the rules but expressed his eagerness to gather feedback and address any questions. While Powell has acknowledged Barr as the Fed’s Wall Street regulator, industry executives hope his concerns will lead to a less stringent proposal. Barr assured that the Fed welcomes comments and data from the industry to help refine the plan and ensure that the final rules accurately reflect risk.
Conclusion
The proposal to overhaul bank capital rules has sparked intense debate within the banking industry. While banks express concerns about potential negative impacts, the Federal Reserve’s top regulatory official, Michael Barr, maintains that the benefits of higher capital outweigh the costs. Barr’s defense of the proposal, his first since its release, highlights the importance of creating a more resilient financial system. The Fed is actively seeking feedback from the industry to shape the final rules and address any potential issues.
