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Fed Bank Watchdog Defends New Capital Requirements

Federal Reserve

Michael Barr wants American banks to see new capital requirements as a help, not a hinderance.

The Federal Reserve’s vice chair for supervision said at an American Bankers Association (ABA) event Monday (Oct. 9) that the proposed rules would make the financial system safer.

“The proposal is projected to raise capital for large banks,” said Barr, whose comments were reported by Bloomberg News.

“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.”

The rules proposed by the Fed and other regulators are in response to a series of banking failures earlier this year. They would force medium sized banks to face tougher requirements, and mandate that bigger banks set aside greater amounts of capital.

The proposal has come under fire from the banking sector, including the ABA and JPMorgan Chase CEO Jamie Dimon.

Speaking at a conference in New York last month, Dimon warned these regulations could hinder economic growth, and called for more transparency in regulator’s decision-making. And in August, Dimon had argued that the proposed requirements would make mortgages and loans less affordable.

As he told CNBC at the time: “If they want to put all mortgages and small business loans out of the banking system, so be it, but they should tell that to the American public.”

The capital requirements were also the subject of a hearing last month on Capitol Hill by the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, where Republican lawmakers argued against the changes.

Rep. Andy Barr (R-Ky.), chairman of the subcommittee, said the regulations have been “delivered in an underdeveloped and hurried fashion, and, in many crucial areas, is glaringly arbitrary and capricious.”

But not everyone who spoke at that hearing agreed the requirements would harm the industry. Mayra Rodríguez Valladares, managing principal, MRV Associates, said that “every time bank regulators in any country want to update bank regulations or implement new ones, there are always voices that claim that regulation will reduce lending or hurt an economy in other ways.”

However, she testified, “since 2010 when Basel III and Dodd-Frank rules started being designed and implemented incrementally, U.S. banking assets have almost doubled. In the same period, U.S. banks’ net income has risen by 225%.”