Jun 10, 2023 - Economy

Big banks are about to get safer

Illustration of a little bank building with a large suited arm pointing at it

Illustration: Natalie Peeples/Axios

The huge and very risky banking industry is likely to see a major toughening of regulations in the near future.

Why it matters: Just as the FTX debacle gave the SEC all the reason it needed for a crypto crackdown, the 2023 banking crisis has given the Fed justification for forcing banks to increase their equity capital.

Driving the news: The WSJ's Andrew Ackerman reported this week that big banks' capital requirements could be raised by as much as 20% in a proposal from regulators expected "as early as this month."

  • That number aligns with estimates from TD Cowen's Jaret Seiberg that bank capital requirements will rise by about 2 percentage points on average, with higher raises for the biggest "mega banks."
  • Current capital requirements range from 7% for some regional banks up to 12% for JPMorgan and 13.3% for Morgan Stanley and Goldman Sachs.

Between the lines: Now is a good time to increase capital requirements, since big banks are flush from a series of good years. JPMorgan's capital stands at $227 billion or 13.8%, for instance, which means a 2.5-point hike in capital requirements to 14.5% would only mean a 0.7-point increase in extra needed capital.

What they're saying: “Empirical research supports the social benefits of strong capital requirements at banks," said Federal Reserve vice chair Michael Barr in December speech entitled "Why Bank Capital Matters."

  • "Better capitalized banks have the capacity to support the economy by continuing to lend to households and businesses through stressful conditions."

Flashback: The global financial crisis of 2008-09 proved that most of the world's banks were inadequately capitalized.

  • The world's bank regulators convened in Basel, Switzerland, to fix that problem — and in September 2010 they announced a new set of capital adequacy standards, known as Basel 3.
  • Basel 3 was — and is — the most impressive feat of regulatory coordination I've ever seen. But even now, 13 years later, it's not fully implemented.

What's next: No one can agree on what to call it — it's variously known as Basel 3.1, Basel 4 or Basel Endgame — but a pandemic-delayed final adjustment of U.S. capital adequacy rules finally seems to be nigh. (Europe already released its Endgame rules in late 2021.)

  • Loans to commercial real estate in particular might end up requiring much more capital than they currently do, per Seiberg.

The bottom line: The latest increase in capital requirements has been a very long time coming. The recent banking crisis is going to make it much harder for banks to object to it.

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