Dollars & Cents

Click here to listen to this article!

In an effort to address a perceived problem, the pendulum always seems to swing too far in one direction. This is especially true for regulatory agencies such as bank regulators. They tend to overreact. In addressing the recent bank failures and stress in the financial system, regulators are proposing an overreaction that will impose additional burdens on bankers.

Recently, the three primary federal regulators — the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency —issued a 1,087-page rule that will raise capital requirement for large banks by about 16 percent. Large banks are defined as having more than $100 billion in assets.

Bank capital is the difference between a bank’s assets and its liabilities. It represents the net worth of the bank and can be thought of as a cushion to account for risks associated with banking activities.

The proposal would revise the capital requirements in four main areas: credit risk, market risk, operational risk, and derivative risk. In addition, it would require large banks to include unrealized gains and losses from certain securities held by them.

This action is primarily a response to the failure of Silicon Valley Bank (SVB) earlier this year. SVB’s assets — mostly loans to startup firms in the immediate area — were longer term and made at low interest rates. Its liabilities, primarily deposits, were of short duration. As the Fed increased interest rates, SVB had to sell assets at reduced valuations to cover customer withdrawals. Finally, it was unable to meet all withdrawal demands, and regulators closed it.

In short, the mismatch between the duration of assets and liabilities led to the downfall. It did not fail because of insufficient capital. But regulators are now addressing the issue by increasing capital requirements.

The new regulation will be onerous and unnecessary. In addition, it will nullify an earlier agreement that provided relief for banks having $100 billion to $250 billion in assets.

Bankers have until November 30 to respond to the proposal. The American Bankers Association (ABA), the Consumer Bankers Association, and the Financial Forum have criticized the proposal. The ABA pointed out that the regulators are “determined to push forward new capital requirements despite strong evidence that the U.S. banking system is already well capitalized as the regulators have concluded… Higher capital requirements come at a cost to the economy.”

Unfortunately, the flawed proposal to increase capital requirements seems to be typical of many regulators today.

Wayne Curtis, former superintendent of Alabama banks, is a retired Troy University business school dean. Email him at wccurtis39 @gmail.com.