MNI: Fed's Barr Defends Proposal To Raise Capital Requirements

Raising large banks' capital requirements will help the financial system weather unexpected stress without necessarily hurting lenders' profitability or market valuation over the long run, Michael Barr, the Federal Reserve's top banking regulator said Monday in defense of the Basel III "endgame" proposal that's come under attack from banks and lawmakers.

The effective rise in capital requirements related to lending is a small portion of the overall capital increase and would only increase funding costs by up to 3 basis points, Barr noted. The bulk of the rise has to do with trading and other activities that have generated outsized losses in the past.

Those private costs must be weighed against the social benefits of a more resilient financial system, because increased overall capital will reduce the likelihood of a costly financial crisis, he said in remarks prepared for the American Bankers Association's annual convention.

"The proposal is projected to raise capital for large banks. This may result in higher funding costs. But this is only half the story. Capital also enables banks to absorb more losses without risking their ability to repay their creditors," he said.

BANKS WILL BE FINE

Barr stressed he welcomed comments that shed light on additional considerations for the costs and benefits of the proposed rule, especially how specific risk weights could raise the cost of funding for a specific loan or other channels by which higher capital requirements could matter.

The bank regulators have already heard concerns that the proposed risk-based capital treatment for mortgage lending, tax credit investments, trading activities and activities that generate fee-based income might overestimate the risk of these activities, he said. The 120-day comment period ends on November 30.

The initial set of reforms enacted after Dodd-Frank was passed in 2010 have strengthened the U.S. banking system and resulted in a doubling of the common equity capital ratio of the largest banks, Barr said. At the same time, the U.S. banking system has nearly doubled its assets and bank profitability measures have recovered close to historical averages.

"As these initial reforms were being put in place, many in the banking sector claimed that the changes would harm lending and the broader economy," he said. But "as banks increased their capital cushions, their profitability grew, as did their market valuation."

"This is not to dismiss arguments that higher capital could harm the economy — just to note that similar warnings were not borne out in recent experience."