FRB Vice Chair Barr Defends Proposal to Raise Bank Capital Requirements

Federal Reserve Board Vice Chair for Supervision Michael S. Barr described the recent "endgame" proposal to raise capital requirements for large banks (see related coverage) as "the last major plank to address gaps in regulation dating from the Global Financial Crisis" and argued that "the benefits of the proposal would outweigh the costs."

In an address before the American Bankers Association, Mr. Barr highlighted three benefits under the proposal.

First, he said "the proposal would replace the internal models approach for credit risk with a non-modeled approach." He argued that the change would standardize, and make transparent and consistent across banks, the "drivers of credit risk."

Second, Mr. Barr said "the operational risk capital requirements would be standardized rather than modeled and would be a function of a banking organization's business volume and historical operational losses." He argued that current use of internal models presents substantial uncertainty and volatility. He said that the proposal addresses the fact that "large banks with higher overall business volume are likely to have exposure to higher operational risk" and that "higher operational losses [are] associated with higher future operational risk exposure."

Third, Mr. Barr said the proposal would address "material shortcomings" in the current capital rule, including that "the current framework could result in capital requirements increasing during stress, rather than requiring firms to hold sufficient capital in advance of the stress to be manage[able] through a stress period." He also said the proposal would better "account for the large range of liquidity profiles across trading exposures."

Mr. Barr emphasized that "the vast majority of banks in the country—would not be subject to the Board's recent 'endgame' proposal on bank capital," and that "the proposal affects only the very largest banks."