Fed official demands stricter bank regulations, causing shares to plummet.
A top Federal Reserve official has called for tougher regulations for regional banks, saying on Tuesday that the recently unveiled regulatory proposal for more stringent bank capital requirements don’t go far enough, with the S&P 500 banking index plunging to a one-month low.
Speaking at a town hall in Minnesota on Aug. 15, Minneapolis Federal Reserve President Neel Kashkari was asked about a recent proposal put forward by U.S. banking regulators to make bigger banks hold more capital as an emergency buffer in times of crisis.
The new proposed framework (pdf), dubbed the “Basel III endgame,” would force applicable U.S. lenders to set aside billions of dollars overall in order to bolster their ability to absorb losses when things get tough.
All told, the rules would collectively require qualifying U.S. banks to hold an additional 2 percentage points in capital above current levels.
Doesn’t Go Far Enough
Regulators have expressed confidence that America’s banks could handle the additional burden associated with the tougher capital requirements.
Some in the banking industry have warned that the proposed rules would raise borrowing costs for consumers and damage the economy.
While the proposed rules only apply to bigger banks with total assets above $100 billion, Mr. Kashkari said that he thinks the regulatory net should be cast more widely.
“My own personal opinion is it doesn’t go far enough. I think it’s a step in the right direction, but I would like to go significantly further,” he said at Tuesday’s Q&A at APi Group’s Global Controllers Conference in Minneapolis.
As Mr. Kashkari spoke about more government regulation, shares of regional lenders PacWest Bancorp, Zions Bancorp, and Western Alliance Bank slipped, closing the day’s trading session down between 3.7 percent and 4.5 percent.
The S&P 500 banking index dropped 2.75 percent, a one-month low, while the KBW regional banking index plunged 3.4 percent.
The drops also came as Fitch Ratings warned that it may be forced to downgrade a number of individual U.S. banks if it cuts its assessment of the overall banking industry’s operating environment. A Fitch analyst suggested that an overall industry downgrade was increasingly likely.
In his remarks, Mr. Kashkari said he thinks the U.S. banking sector is generally stable although there could be some more flare-ups in the future, especially if inflation stays high and the Fed has to raise rates further or keep them higher for longer.
More Government Regulation
Mr. Kashkari’s remark about imposing greater capital requirements on some banks below the $100 billion threshold came after he addressed the spectacular collapses of Silicon Valley Bank and Signature Bank earlier this year.
The twin bank failures triggered broader turbulence within the banking industry, hitting regional banks particularly hard in the form of increased deposit outflows.
Discussing the causes of the collapses, Mr. Kashkari blamed a combination of rising interest rates, failure to manage risk properly, and U.S. banking regulators dropping the ball.
The panel moderator then asked whether Mr. Kashkari expects more government regulation of the banking sector in light of the failure of supervision.
“I do,” Mr. Kashkari replied, giving as an example the recently proposed “Basel III endgame” rules for increased bank capital requirements.
“What does it mean, capital requirements? This is the buffer that banks have to cover their losses. The more buffer they have, the safer they are but the more buffer they have, the less profitable they are,” he said, adding that ”banks don’t like this.”
Calling the proposal “thoughtful” and “very positive,” Mr. Kashkari said the proposed rules wouldn’t apply to community banks but mid-sized and bigger institutions, before adding that he’d like to see the rules apply to smaller institutions than the $100 billion asset cap. He did not specify what threshold he had in mind, however.
Increasing capital requirements hurts bank profitability because the money that is set aside as a rainy-day buffer could otherwise be put to productive (and profitable) use by, for example, making loans.
Bank Sector Stable But Flare-Ups Possible
Mr. Kashkari also said at Tuesday’s town hall in Minneapolis that the Fed has made some progress in its inflation fight but interest rates might still need to go higher to finish the job.
“I’m not ready to say that we’re done,” Mr. Kashkari said. At the same time, with inflation showing signs of slowing in recent months, he said, ”I’m seeing positive signs that say, hey, we may be on our way. We can take a little bit more time to get some more data and before we decide whether we need to do more.”
The Fed has lifted its benchmark policy rate target by 5.25 percentage points since March 2022, the fastest pace of hiking since the 1980s.
As the Fed funds rate has been pushed rapidly to within a range of 5.25 percent to 5.00 percent, inflation has fallen
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