Capital requirements overhaul will have 'significant impact' on regional banks: Reporter
Bank regulators are set to overhaul capital requirements, lowering the threshold for banks with $100 billion in assets. What will this mean for the financial system after regional bank turmoils earlier this year? American Banker National Editor Kevin Wack explains what this means for regional banks and how it inversely impacts the larger institutional banks.
Video Transcript
JULIE HYMAN: While US regulators are set to release a new framework for the banking industry next week, the sweeping overhaul is expected to lower the threshold for capital requirements to include banks with at least $100 billion in assets that's a bar far lower than the existing $250 billion cutoff. Dozens of regional banks could find themselves suddenly beholden to new rules with stricter requirements, what does the landscape look like now for regional lenders?
And I should mention Bloomberg reporting this morning that, in particular, regulators are going to be focusing on mortgage requirements as well. Kevin Wack is joining us now with more. He's the national editor at American banker. Kevin, thanks for being here. So what is sort of the big takeaway here about these changes? How fundamental are they going to be to how the banks do business?
KEVIN WACK: Well, I do think this underpin the bank's business, the capital requirements, and they should have a significant impact on the regional banks, as you mentioned, the ones between $100 and $250 billion of assets, in particular. The mortgage requirements that you talked about that Bloomberg was reporting on last night, I think those are expected to mostly hit the larger banks, but the impact overall of these capital rules on those mid-sized regional banks will be substantial.
- So Kevin, the regional banks have pushed back on this prospect of new additional scrutiny citing that it would be more costly for them. Is the pushback warranted?
- It will-- it will have costs for the banks. I think there's no question about that. Now, whether that outweighs all the other kind of benefits that come from higher capital requirements in terms of sort of the stability of the overall financial system, that's a different question. There's also been a lot of discussion about, you know, whether and to what degree higher capital requirements will lead to less lending or a decrease in lending, and there's just a lot of debate about that. I don't think the research is super clear, but there is no question that there will be real costs to the banks.
- And from what we're hearing, this is already a time when the banks have higher costs from other stuff. Right, Kevin? In other words, at a time when many of their deposit growth trajectories are challenged, they have to pay more for the deposits they're getting. So that presumably is going to continue to put some pressure on them.
- Yeah. Definitely. And as the regional banks start to report their earnings this week, I think we expect to see that story continue to play out. The big banks which have largely reported now, a little bit more shielded from the cost pressure on the deposit side, but PNC reported its earnings this morning maybe the first of the regional banks, you know, they showed some of that cost pressure on the deposit side this morning in their earnings report. And I think we'll continue to see that at the other regional banks.
- And Kevin, I want to ask you, so one of the concerns for the regional banks is with this increased pressure and more regulation, more cost, the concern is that could then trigger more regionals failing. Is that a problem when you think about kind of the overall banking landscape from your analysis? I mean, you know, of course, it wouldn't leave us with just the big banks. You know, you may still have the super regionals as you call it, but it certainly decreases the options.
- Yeah. I mean, you know, what you had happen in the spring was three-- you know, not that they were regional banks, but they were not all that huge that failed. And you know, you saw a really significant impacts throughout the banking sector from the failure of those banks in just a lot of fear and anxiety that kind of roiled the markets. So if that were to happen again with more regional banks, I would, you know, expect those domino effects to play out again.
Now, you know, I don't know that we're necessarily seeing signs that, you know, we're on the verge of, you know, a more regional bank failures at the moment, notwithstanding some of the costs that you talked about, but, you know, I do think that there are reasons that the market remains concerned, you know, about some of these issues.
The issue of unrealized losses on securities portfolios was a key reason that Silicon Valley Bank and First Republic Bank failed and, you know, there are a number of banks-- many of them smaller-- that have similar sort of unrealized losses as a result of rising interest rates. And so that's definitely something to keep watching.
- All right. We will continue to watch the banking sector. I mean, we continue to get results today. We'll get more. Thank you so much to Kevin Wack, national editor at "American Banker."
