Regulators are aligned on capital reforms. Congress is a different story
By Kyle Campbell
July 12, 2023Federal regulators have lined up behind stronger capital requirements for large banks, but questions remain about how much political support they can generate in Washington — and how much they will need for their efforts to last. Unlike the last time bank capital standards were increased after the subprime mortgage crisis, this latest push lacks clear champions in Congress…. Karen Petrou, managing partner of Federal Financial Analytics, said the full impact of the changes will have to be spelled out in the regulators’ notice of proposed rulemaking. In particular, Petrou said the focus will be on differences between the current advanced approaches model used for determining risk-based capital requirements and the new standard approach that will be implemented to align with the so-called Basel III endgame. While capital levels overall will go up as a result of this change, she said, the treatment of specific exposures under the new rules will determine which firms bear the brunt of increase. For banks that have been subjected to the advanced regulations, a switch to a new standard could actually bring a modicum of relief. Because of this, Petrou said she puts little stock in Barr’s assertion that the changes will result in an average increase in capital of 2% across the impacted banks, or that banks could raise the additional equity needed in just two years.”That’s just an average. It’ll have a big impact on the individual business models. The variation around that mean or average is enormous,” she said. “Look at what happened on the stress test where, on average, banks all looked pretty good, but several banks were four or five percentage points into the red.”