Federal Regulators Propose Stricter Capital Requirements for Big Banks to Safeguard Against Bank Runs

According to the Wall Street Journal's report on Monday, federal regulators are gearing up to introduce new banking regulations that would compel major banks to maintain up to 20% more capital. These fresh standards will vary depending on the type and size of the bank, with the strictest requirements being imposed on "megabanks" primarily engaged in trading, such as Goldman Sachs (GS). On average, large banks would be subjected to a 20% increase in their capital requirements.

The primary objective of these stricter capital requirements is to enhance banks' ability to withstand bank runs similar to the one that affected Silicon Valley Bank in March. Capital requirements oblige banks to hold a certain portion of their assets in liquid or easily sellable forms, enabling them to absorb losses without failing and acting as a safeguard against bank runs and other risks.

Banking regulators have been contemplating raising capital standards for several years, even prior to the series of bank failures this spring that compelled the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation to take decisive action to rescue depositors at collapsed banks and stabilize the financial system to avert a wider collapse.

In September 2022, the Federal Reserve and other federal agencies responsible for bank regulation expressed their commitment to adhering to international standards and revising capital requirements for banks with the aim of strengthening the resilience of the domestic banking system.

However, banks have voiced their opposition to the proposed regulations. The Financial Services Forum, a trade group representing major banks, published a report earlier this month arguing that capital requirements could have adverse consequences, such as increasing borrowing costs for individuals and businesses and driving them to seek financial services from nonbank providers.