U.S. regulators want banks to set aside more cash to guard against risks. Banks aren't happy

U.S. regulators unveiled a sweeping overhaul Thursday that would direct banks to set aside billions more in capital to guard against risk, which was immediately slammed by the industry as "misguided."

If fully implemented, the proposal would raise capital requirements for large banks by an aggregate 16 per centfrom current levels, with the brunt felt by the largest and most complex firms, regulators said.

Current rules require banks to keep a certain amount of capital on hand as a percentage of how much they lend out. The idea is to restrain them from loaning out too much, and the ratios for U.S. lenders have not been raised in years.

The industry is already warning that such a big hike could force them to trim services, raise fees, or both.

U.S. officials argued Thursday that such costs would be more than offset by the benefit of a more resilient banking system.

The proposal, approved by the Federal Deposit Insurance Corporation (FDIC) and set to be voted on by the Federal Reserve, marks the first in an extensive effort to tighten bank oversight, particularly in the wake of spring turmoil that saw three large financial firms fail.

However, the effort was not unanimous. Two Republican members of the FDIC voted against the proposal as misguided and onerous, and two Republican members of the Fed indicated in prepared remarks they would also oppose the package on similar grounds.

Fed chair Jerome Powell, a Republican who was renominated to the post by President Joe Biden, said in a prepared statement he supported advancing the proposal to receive public comment, but added regulators must strike a "difficult balance."

"Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary," he said.

Basel regulations

The proposed rule, which would implement a 2017 agreement which originated via the Basel Committee on Banking Supervision, aims to overhaul how banks gauge their riskiness, and in turn how much reserves they must keep as a cushion against losses.

Fed Vice Chair for Supervision Michael Barr said the proposal better aligns capital requirements with risk, ensuring a more stable financial system.

The proposal would overhaul how banks must measure risk from lending, trading activities and internal operations. In several cases, the plan would scrap a prior reliance on bank internal models to measure various types of risk, instead opting for a standardized approach, which regulators argue would produce more consistent and comparable results.

WATCH | Why Silicon Valley Bank failed:

Why Silicon Valley Bank collapsed | About That

2 years ago

Duration 10:53

The sudden collapse of Silicon Valley Bank has rattled both U.S. and Canadian markets. About That producers Kieran Oudshoorn and Lauren Bird examine what led to the banks failure.

The proposal also reverses previous relief for banks with over $100 billion US in assets, after several mid-sized firms failed in the spring. Under the plan, banks of that size would have to account for unrealized gains and losses on some securities, as well as adhere to a stricter requirements as to how much leverage they can have.

The largest U.S. banks like JPMorgan, Citibank, Bank of America and others would see their capital requirements go up 19 per centon average, whilebanks with $250 billion or more would go up an average of 10 per cent, and banks with $100 billion-$250 billion up an average of 5 per cent, in line with prior expectations.

Shares of major banks were flat or down on the news.

The Securities Industry and Financial Markets Association said a proposed operational risk capital charge would penalize firms that are involved infee-based wealth management and investment banking activities.

"Imposing a punitive capital charge on businesses that provide steady fee income is misguided," said SIFMA president and CEO Kenneth E. Bentsen, Jr in a statement.

The sweeping proposal, which spans over 1000 pages and asks for input on dozens of topics, will kick off an intense lobbying battle by the banking industry as firms seek to soften, delay, or otherwise derail the effort. Regulators said they will take public input on the proposal until November 30, and aim to have the requirements fully phased in by July 1, 2028.

Top officials at banks like JPMorgan Chase, Bank of America, and Morgan Stanley have warned stricter rules could force them to pull back from services or increase fees. Analysts say it could take years of retained earnings to comply, pinching their ability to boost dividends or buy back shares.

Agency officials said Thursday most banks already have enough capital to meet the proposal, and firms that need to catch up would need at most two years of retained earnings to do so.