Banks Could Face New Capital Rules. Here's What That Means for Investors and Consumers

On July 27, 2023, U.S. federal banking regulators issued proposals that would require banks with at least $100 billion in assets to hold nearly 20% more capital. The proposals would also overhaul how banks measure the riskiness of their behavior.

While the proposal, which is currently being put out for public feedback by the Federal Reserve, won't go into effect until 2028, it's already being hotly debated. Here's what these new capital rules may mean for investors, consumers, and the industry.

What are capital requirement rules?

Under existing rules, banks are required to hold a certain percentage of capital in reserve to ensure they have enough money to absorb potential losses. These regulations are in place to protect depositors and ensure banks remain solvent during any crisis or market volatility.

What would change?

The proposed changes to the capital rules would force banks to hold more capital in reserve, ensuring they have enough cash to cover any losses during an economic downturn. Banks with assets above $100 billion would be required to increase their capital reserves by approximately 16%.

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The nation's eight largest banks will face an even higher increase of around 19%, while smaller lenders with assets between $100 billion and $250 billion can expect a more modest rise of as little as 5%. These new regulations aim to ensure banks are stronger and more resilient to financial shocks, reducing their chances of failing or requiring government bailouts.

However, the industry is not happy about having to raise an extra 20% of capital. Some officials claim that it is a significant amount and could lead to increased costs for banks, which would be passed onto customers.

How would this affect investors and consumers?

Increased capital requirements could have a significant impact. If banks are required to raise their capital levels, they may choose to pass some of these costs onto consumers in the form of higher fees on bank accounts or interest rates on loans. This could affect personal and business accounts and could hit some of the most vulnerable customers the hardest.

Higher capital requirements would also mean that banks could cut dividends, reduce share buybacks, or issue new shares. Banks may also be forced to trim services to meet the capital requirements.

Proponents however say that higher capital requirements should ultimately lead to more stable banks, which could help prevent future financial crises. So, while consumers may have to pay more in the short term, they could benefit from a safer and more stable banking system in the long run.

What does this mean for you now?

During a recent statement, Jerome Powell, the Chair of the Federal Reserve, supported releasing the proposals for public review. However, he promptly pointed out several concerns regarding the plan, emphasizing the challenging task regulators face in finding the right balance.

Regardless, if the proposals do pass, banks will have until 2028 to fully implement the new capital requirements. At this point, it's too early to tell how this will affect the banking industry. Therefore, there's no need to make any rash decisions based purely on speculation.

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The potential changes to capital rules for U.S. banks could have significant implications for the banking industry. While banks are not pleased about these new regulations and claim they could lead to increased costs for them and their customers, those in support say higher capital requirements should ultimately lead to a more resilient banking system. It may take some time to see the full impact of these changes, and the proposal may see some changes before it's passed.