Big banks could face capital requirement boosts from regulators: Report

Regulators are set to propose legislation raising capital requirements for big banks by up to 20 percent according to the Wall Street Journal. WSJ Reporter Andrew Ackerman highlights what this will mean for larger banks and how it could impact parts of their business segments.

Video Transcript

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SEANA SMITH: Big banks may soon have to boost their capital requirements in order to buffer potential losses. Larger banks that are heavily dependent on fee income who may have or have seen safe from massive regulation may soon have to keep stores of around 20% under new regulation, which could come into play as soon as next month. This is according to the Wall Street Journal.

Well, the reporter from The Journal who broke that story, Andrew Ackerman, joins us now. Andrew, it's good to see you here. So reading through this report, just talk to us just a little bit more about the shift that we're seeing under the Biden administration, how that compares to the Trump administration, exactly what this new requirement would mean for larger banks.

ANDREW ACKERMAN: I think it means that they're going to have to raise a ton of capital over a several year period. And it-- it sort of shows regulators trying to grapple with how do we respond to the failure of Silicon Valley Bank, at least partly. These rules were already in train before SVB failed in March. But the regulators have come back. And they said, you know, SVB failure kind of shows we have to be humble about the risks that are out there, and the overall system needs to be a little bit more resilient.

And so they're going to start to impose some of these tougher capital rules on banks all the way down to about $100 billion. So much smaller than the global systemic-- systemically important banks. We're going to see mid-size and regional banks of SVB size hit by these new rules.

AKIKO FUJITA: So let's talk about what this means for some of these banks. I mean, we've heard some of the big banks already respond in a way to say, look, this is going to hurt the businesses. It's going to hurt the borrowers if those capital requirements are higher. What does it mean for those mid-sized banks that were really at the heart of some of these ripple effects?

ANDREW ACKERMAN: I think it means that it's going to encourage greater consolidation. I think that's an open question. But you could see sort of this natural trade-off where, you know, banks are sort of-- the regulators become more permissive around mergers. So they allow more banking tie-ups in exchange for these tougher rules that are coming over the coming years. That makes sense. You want to be bigger to kind of have a, you know, bigger economies of scale to deal with it, enhanced regulations.

Right now, we don't-- I don't know. That's speculative. The regulatory team in office now has decided that big bank mergers, generally speaking, in normal times, they've been very, very reluctant to approve them. They've been critical of big banks that get even bigger. And so there's this open question, you know, given that we're in this sort of fragile environment, will they be more permissive?

SEANA SMITH: And Andrew, also the consumer impact, which Akiko just briefly mentioned there, but how much harder it could potentially be for Americans to get those loans?

ANDREW ACKERMAN: Yeah. I mean, I think if banks are facing a huge increase in regulatory costs, they may very well push-- you know, pull back from some of the activities. I think what's striking about the coming rules and capital rules in particular is that businesses with large fee businesses, fee-based businesses, so wealth management businesses or American Express, which has a big credit card-- they collect swipe fees-- they're going to be hit hardest.

And so if you're, you know, a Morgan Stanley, where you've gotten out of trading, say, and into something that's relatively benign like wealth management, do they step back from that? You know, these are all-- I think it'll be-- I think we're going to be following closely what happens with respect to how the banks respond to these new rules.

AKIKO FUJITA: Andrew, you talked about the potential for more mergers in the space. And I wonder if we can talk about the inherent challenge. Some would argue the conflict that that's likely to play out as a result of this. I mean, on the one hand, you think back to what happened with JP Morgan when they acquired First Republic. And the criticism that came out saying big banks are only going to get bigger. And yet your story seems to point to the fact that the big banks are the ones that are most capitalized that could, you know, provide most stability to the system.

ANDREW ACKERMAN: Yeah. I'm not exactly sure how to respond to that. I think what is worth noting is, you know, the JP Morgans of the world can absorb higher capital requirements. I don't think they have an additional 20% above the current capital rules right now. So I think even for them, this might be challenging.

I think it's important to note, the banks are going to have several year phase-in period for most of these changes. It's not just the Basel rules that are coming into play though. The smaller banks will have what's called TLAC. They'll have to issue longer term debt that for what's called a bail-in if they get into trouble. There's stress tests. They're going to get much more stressful. So you're going to see a lot of pressure to consolidate over the coming years. And I think that that's an important, you know, thing to watch, you know, how the regulators respond to that.

AKIKO FUJITA: Yeah. Ultimately, I mean, what does that mean in terms of what the landscape looks like in this space, you know, five years from now?

ANDREW ACKERMAN: I think-- yeah. I mean, I think if you've got 40 or so banks in, you know, around $90 billion to, you know, $700 or so, I-- my numbers might be a little off. But you could see that shrinking noticeably through mergers and tie-ups.

SEANA SMITH: All right. Andrew Ackerman from The Wall Street Journal, thanks.