Holistic Capital Review
Vice Chair for Supervision Michael S. Barr
Highlights from the speech:
- The existing approach to capital requirements is sound.
- With respect to risk-based requirements, the standards should be updated to better reflect credit, trading, and operational risk. To help promote international comparability, the updates to the standards should be consistent with international standards adopted by the Basel Committee.
- The stress test should continue to evolve to better capture risk. The exploratory analysis conducted this year demonstrates the capacity of supervisory stress testing to test for a wider range of risks and the value of doing so.
- With respect to the other capital buffers — the global systemically important bank (G-SIB) surcharge and the countercyclical capital buffer (CCyB) — I am not recommending fundamental changes.
- With respect to the enhanced supplementary leverage ratio (eSLR), I am not recommending changes to the calibration at this time. With the revisions in risk-based capital requirements I mentioned above, the eSLR generally would not act as the binding constraint at the holding company level, where Treasury market intermediation occurs.
- For a firm’s lending activities, the proposed rules would end the practice of relying on banks’ own individual estimates of their own risk and instead use a more transparent and consistent approach.
- For a firm’s trading activities, the proposed rules would adjust the way that the firm measures market risk, which is the risk of loss from movements in market prices, such as interest rate, equity price, foreign exchange, and commodities risk. The proposed changes better align market risk capital requirements with market risk exposure and provide supervisors with improved tools.
- For operational losses—such as trading losses or litigation expenses—the proposed rules would replace an internal modeled operational risk requirement with a standardized measure.
- These changes would increase capital requirements overall, but I want to emphasize that they would principally raise capital requirements for the largest, most complex banks.
The full speech is available at https://www.federalreserve.gov/newsevents/speech/barr20230710a.htm
The Bank Policy Institute had a critical response:
“Remarkably, Vice Chair Barr’s “holistic capital review” apparently did not include any consideration of the cost of capital requirements – costs to economic growth, credit availability, market liquidity or the economy as a whole. It is thus an atomistic rather than holistic review – a benefit-benefit analysis of capital requirements. We hope that others will take a broader view of the facts and reach different conclusions.”