Michael Barr (image below) the Vice Chair for Supervision at the Federal Reserve, gave a highly aniticipated speech. He announced that minimum requirements for deposit insurance and capital at the largest U.S. banks would increase by 9 percent. Initially, the Fed had planned a 19 percent hike.

(Image: Federal Reserve)

A final ruling on these capital requirements is not expected until mid-2025, and even after that, it may take at least another year before the new regulations come into effect.

Higher Requirements for Systemically Important Banks

The banks affected include JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Bank of New York Mellon, Morgan Stanley, Wells Fargo, and State Street. These banks, due to their systemic importance, are required to hold more capital to protect against unexpected losses and economic shocks than smaller institutions. While smaller banks are expected to boost their equity capital by 3-4 percent, they remain exempt from most of the stricter rules. The threshold is set for banks with assets exceeding $250 billion.

The regulatory authorities revised their draft after review and consultation, according to Barr. The plans to require large banks to hold more capital were also a response to the collapses of Silicon Valley Bank and First Republic Bank in the spring of 2023.

Costs and Competition

Wall Street banks have actively lobbied against these plans, supported by politicians from both sides of the aisle. Their argument: the banking crisis wasn’t caused by capital issues, and raising requirements for market leaders would worsen and increase the cost of lending conditions for American consumers and small and medium-sized businesses. The competitive landscape was also a point of contention.

These are similar arguments heard from UBS in the aftermath of the Credit Suisse takeover, when stronger regulation was discussed.

Switzerland Implements, EU and UK Hesitate

Banks in other countries have also resisted the Basel III regulations. The EU, for instance, has delayed implementing parts of the rules until 2026, largely due to pressure from French banks. Observers in the U.K. also expect a softening of the rules, with the Bank of England likely to delay the start of stricter capital requirements from mid-next year to early 2026. Concessions on lending to small businesses and mortgages are also being considered.

In contrast, Basel III standards are set to be fully implemented for banks in Switzerland as planned on January 1, 2025. Recently, banking representatives proposed delaying certain aspects of the regulations. However, the Federal Council did not entertain this suggestion and decided to proceed with the implementation at the beginning of 2025 as planned, a decision confirmed at the end of June.

The Federal Council announced that the amendment to the Capital Adequacy Ordinance (CAO) will be incorporated into Swiss law as planned from the beginning of 2025. The timeline was set in November 2023. Despite delays in some countries, the Federal Council intends to adhere to the schedule, the statement continued.

A Lesson in Humility

«The opportunities to learn the lesson of humility in life are plentiful,» Barr said in his Tuesday speech, defending the necessity of new guardrails for the largest U.S. insitutions.

«Some in the industry claim that inadequate capital had nothing to do with these bank collapses,» he added. «I disagree.»

Barr′s «re-proposal» is seen by some as a concession to industry pressures.