Earlier this week Federal Reserve Vice Chair for Supervision Michael S. Barr delivered a speech called Holistic Capital Review, sharing thoughts on the banking sector’s existing capital requirements imposed by the Fed.
He firmly stated:
… the existing approach to capital requirements is sound.
Illustrated through nondescript mentions, despite this alleged soundness, he did find some ways to improve the fatally flawed system:
With respect to risk-based requirements … The international standards were developed through a rigorous, lengthy process, have been under discussion for nearly a decade and will improve on the extent to which capital requirements fully reflect the risks posed by different banks engaged in a variety of activities.
There is a pattern of first mentioning that everything is fine followed by ways to make improvements:
With respect to stress testing, I believe that the stress capital buffer framework is sound. At the same time, I believe that the stress test should continue to evolve to better capture risk.
It’s all part of the plan, literally! They call it the Basel III Endgame, explained by the Vice Chair:
An important aspect of my proposals will be to implement the changes to the risk-based capital requirements, referred to as the Basel III endgame, which are intended to ensure that our minimum capital requirements require banks to hold adequate capital against their risk-taking.
It comes off rather vague. But central bankers could force banks to have stricter capital requirements, such as holding more cash, or attempting to get banks to engage in less risky behavior, as defined by regulators.
In the eyes of the regulator, banking failures such as Silicon Valley Bank (SVB) seem more to do with the bank’s faulty capital structure than problems caused by the Fed. As explained:
Some industry representatives claim that inadequate capital had nothing to do with those bank failures. I disagree. It was an unsuccessful attempt by SVB to raise capital that caused uninsured depositors to look more closely at how the bank was capitalized.
He went so far as to say:
If SVB had enough long-term debt outstanding, it might have reduced the risk of a run by uninsured depositors…
When it comes to diagnosing problems within the banking system, we cannot trust a central banker to blame the organization paying his salary. However, the takeaway from this would be the continuous need for regulatory and supervisory enhancements in the system. We are expected to believe these improvements in capital structure will ensure the prevention of future bank failures, as if this will mark the final implementation of rules for time on end.
Whatever they decide, they should not call it an endgame, as this game is not meant to end.
