Banks would be required to hold less capital in reserve under a new set of rules pitched by regulators this week.
The Federal Reserve on Thursday unveiled the proposed updates to rules on how much capital banks must keep in reserve. The Fed's Board of Governors approved the proposals to amend the Basel III accords—put in place after the Great Recession to prevent another financial collapse—by a vote of 6-1.
Michelle Bowman, the Fed's vice chair for supervision, said the proposals tackle "unintended consequences” in the post-recession rules.
Added requirements pushed activity into less-regulated sectors like private credit, Bowman explained. They constrained credit availability while adding complexity and cost.
"An important benefit of these proposals is that they would reduce incentives for traditional lending activities—like mortgage origination, mortgage servicing, and lending to businesses—to migrate outside of the regulated banking sector," she said.
Fed Chairman Jerome Powell said the rules increased the banking system's resilience. But, he noted that it made sense to tweak the framework for the financial system in the lessons learned in the past two decades.
Lawmakers have put forth many proposed modifications to the financial system this year. Many of these changes loosen post-recession banking rules to help make mortgages and other real estate costs cheaper.
Reserve rules get a new look
The Fed, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency released the rules as a request for comment. That means the public has until June 18 to submit feedback while regulators refine the rules.
The changes would reduce capital requirements for the largest banks by 4.8%, midsized banks by 5.2%, and smaller banks by 7.8%.
The three different changes to rule-making affect banks of all sizes. One modifies capital requirements for servicing and originating mortgages and changes how they report unrealized gains and losses.
A second proposed rule would change risk sensitivity rules and the calculations for how they comply with risk-based capital requirements. That would affect the largest and most internationally active banks.
The third proposal would improve how systemic risk is measured for those large and complex banks.
The Fed said these proposals could "modestly" decrease the amount of overall capital in the banking system. But it noted that the guardrails remain significantly higher than before the Great Recession.
"Financial regulations put into place since the global financial crisis substantially increased the banking system's resilience," Powell said. "However, it is prudent to reexamine our regulatory frameworks at regular intervals and strive to modernize our rules to help maintain international standards in a way that is appropriate for the U.S. banking system."
Fed Gov. Michael Barr, the lone vote against the rules, said he believed reductions in capital requirements were "unnecessary and unwise." They could lead to a less resilient system, he added.
"I fear that, if this much weaker version of Basel III is adopted in the U.S., it could trigger a 'race to the bottom' on standards, harming the global financial system," Barr said.
