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Fed Vice Chair Barr Unveils Plan to Strengthen US Banking Sector's Capital Buffer

Amid increasing concerns about the stability of large US banks, Federal Reserve Vice Chair Michael Barr has announced a comprehensive strategy to enhance their financial resilience.

Michael Barr
Michael Barr

Barr's Plan for a More Resilient Banking System

The Federal Reserve's leading regulatory figure has presented a far-reaching proposal to augment capital requirements for the country's major banks. The plan comes in response to recent bank failures, highlighting the necessity for regulatory bodies to strengthen the system's resilience.

Addressing Both Predictable and Unforeseen Risks

During an eagerly awaited speech, Barr, the Fed Vice Chair for Supervision, expressed his intent to launch several regulatory measures that would necessitate larger banks to maintain more in reserve and conform to stricter supervision requirements. "The occurrences of the past few months have further underscored the demand for caution and skepticism, as well as an approach that renders banks resilient to both known and unforeseen risks," Barr stated on Monday, referencing the recent collapse of Silicon Valley Bank and two other lending institutions.

Building on the Existing Capital Framework

Barr articulated that his plan is not about overhauling the existing US bank capital framework, but rather building upon it in numerous ways. These include fully executing an international bank capital agreement and enlarging the scope of the annual "stress tests" aimed at evaluating the financial health of banks.

Expanding Stricter Capital Rules to More Banks

The regulatory official also expressed his desire to impose more stringent capital rules on banks with assets exceeding $100 billion. This would broaden the group of firms that must adhere to these rules. Barr also dispelled any hopes of easing the existing capital rules for globally systemic banks, a move that the industry had been advocating for.

Banks Meeting New Standards Without Major Disruptions

In his reassurance to the banking sector, Barr stated that most banks are already in a position to meet the new standards he proposes. He added that firms needing to boost their capital could achieve this within two years of retained earnings, while still being able to maintain their investor dividends.