US banking regulators have unveiled plans to impose even tighter capital rules on big banks, setting up a battle with the industry over whether such mandates will make US lenders less competitive. 

The measures released on Thursday by the Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) would force lenders to thicken their cushions to absorb unexpected losses.

Capital set-asides

Banks with at least $100 billion in assets would have to boost the amount of capital set aside by an estimated 16%; the eight largest banks would face about a 19% increase; and lenders with between $100 billion and $250 billion in assets would see as little as 5% more, according to agency officials. 

The plan would thereby include large firms as JPMorgan Chase and Bank of America, plus mid-sized regional banks such as Fifth Third, Huntington and Regions.

The bank regulators argue the changes are needed to make lenders stronger, more resilient and better prepared for shocks like the crisis of this spring, when the failures of Silicon Valley Bank, Signature Bank, and First Republic prompted deposit withdrawals across the banking world.

“One clear message was that regulatory requirements, including capital requirements, must be aligned with actual risk so banks bear the responsibility for their own risk-taking.”

Michael S Barr, Vice Chair for Supervision, Federal Reserve

The long-awaited US reforms are also tied to Basel III, an international overhaul that started more than a decade ago in response to the financial crisis of 2008. That international regulatory accord introduced a set of reforms designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand.

Ameliorating stress in the banking system

“Recent events demonstrated the effects that stress at a few large, regional banking organizations could have on the stability, public confidence, and trust in the banking system,” said acting OCC director Michael Hsu.

“One clear message was that regulatory requirements, including capital requirements, must be aligned with actual risk so that banks bear the responsibility for their own risk-taking,” Fed Vice Chair for Supervision Michael Barr said in a statement. “The proposal takes an important step toward better aligning capital requirements with risk.”

FDIC Chair Martin Gruenberg said on Thursday that most banks would have enough capital to meet the proposed mandates, but five could face shortfalls. The agency estimates that it would take those five banks only about two years to make up for that shortfall, even if they continue paying out dividends, assuming they continue producing profits at the same rate as they have in recent years.

The FDIC held an open meeting on Thursday morning to discuss the plans, ahead of the Fed’s meeting at 1pm ET. Once the rules are formally proposed by both agencies, regulators will take public comment. They must vote again later to finalize them.