On Wednesday, Jerome Powell of the Federal Reserve indicated that the Tremendous Trio, Fed, FDIC, and OCC, would make “broad and material changes” to the proposal and likely scale back the capital requirements.
The original proposal was estimated to increase the capital requirement of the largest banks (the GSIBs) with close to 20% and about 5% for the large banks ($100bn-$250bn in assets).
Needless to say, Team Bank has been very active on the thumbs-down button. They wrote more than 300 comment letters of which 97% gave the proposal zero stars with a Do Not Recommend on top. And they moved themselves into the Influencer Age by putting on ads during Sunday Night Football claiming the Fed was out to get them and Americans in general with “unnecessary capital rules.”
Unnecessary has been at the center of the argument for the biggest players on Team Bank.
“We are already well-cushioned in the capital department and requiring more padding is just gonna leave us unable to move,” the banks said (with a slight paraphrase.)
“If you hold more capital than we require, maybe that’s a sign we don’t require enough,” the regulators replied (again, one imagines.)
Growing Pains
As fun as it is to relay pretend conversations between the two teams, it does sidestep the question that if systemic risk is not coming from the big banks, then where?
WSJ brought an astute answer to that on Tuesday, namely that it is growing big fast, rather than being big, that causes the systemic risk.
Speeding across the line from being a regional bank to a large bank at $100bn in assets is not seamless. Apart from the increased regulatory scrutiny and the risk management infrastructure that entails there is also taking the balance sheet to another level of diversification and granularity.
At least two datapoints have shown that in the past year. Silicon Valley Bank tripped on the line for many reasons of which one was that “core risk-management capacity failed to keep up with rapid asset growth” as the Fed put it. SVB grew from about $70bn in 2019 to over $200bn in 2021.
And our recent frequent share price-diver, New York Community Bancorp, went from $61bn in assets in the first quarter of 2022 to $114bn at the end of 2023 and clearly still have to adjust to that, provided they make it out of the rip currents.
Maybe these growing pains are on the list for the second draft from Team Regulator?
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.