Elizabeth Warren tightens banking rules

Senator Elizabeth Warren and two other Democratic senators are lobbying bank regulators for stricter capital standards in the wake of the collapse of Silicon Valley Bank and Signature Bank.

Specifically, Warren, along with Senator Richard Blumenthal and Tammy Duckworth, supports the adoption of the Basel III framework to increase the quantity and quality of capital held by US banking organizations.

Elizabeth Warren on bank capital rules

As anticipated above, Senate Democrats are pressuring federal banking regulators to tighten bank capital requirements. This follows back-to-back congressional hearings in which officials testified about the failures of Silicon Valley Bank and Signature Bank.

Sen. Elizabeth Warren, D-Mass. a member of the Senate Committee on Banking, Housing and Urban Affairs, is leading calls to strengthen capital rules for banks by aligning with the international “Basel III” framework.

Warren, along with Sens. Richard Blumenthal, D-Conn., and Tammy Duckworth, D. -Ill., wrote in a letter dated Wednesday the following:

“We write to urge you to follow the definition of robust capital requirements that protect consumers and taxpayers and preserve the safety and soundness of our banking system.”

The letter was sent to Federal Reserve Vice Chairman for Supervision Michael Barr, Federal Deposit Insurance Corp. president Martin Gruenberg and Acting Comptroller of the Currency Michael Hsu. Barr.

Notably, the latter is conducting a comprehensive review of the SVB bankruptcy and along with Gruenberg both testified in hearings before Senate and House lawmakers this week.

In the letter, the lawmakers blamed lobbyists and some Republicans for attempts during the Trump administration to loosen capital requirements established after the 2008 financial crisis.

They also claimed that GOP lawmakers were pushing regulators to avoid higher capital standards in the days before bank failures.

Elizabeth Warren pushes for Basel III regulation

In a letter dated 3 March to Fed Chairman Jerome Powell, ten House Republicans on the Senate Banking Committee described Barr’s suggestion to increase capital requirements as “unfounded.”

We see that SVB collapsed several days after sending the letter. Lawmakers also warned against what they called “industry rotation” that blames bank failures on regulatory agency oversight rather than lenient banking regulations.

In this regard, the lawmakers wrote the following:

“These industry officials are right that bank regulator failures are a key part of why Signature and SVB failed, but that doesn’t eliminate the need for strong capital requirements.”

The senators also pointed to the Fed’s decision in March 2020 to simplify capital rules for large banks as evidence of a withdrawal of regulations. Under the “stress capital buffer” implemented at the time, capital requirements for banking firms are determined annually based on supervisory stress tests.

In conclusion, Warren, Blumenthal and Duckworth are pushing for regulators to fully implement Basel III, which is a set of international regulatory standards for banks that would increase both the quantity and quality of capital held by US banking organizations.

The Fed has also proposed rules to standardize minimum liquidity requirements for large, internationally active banking firms under Basel III.

Basel III: what is it all about?

The Basel Committee on Banking Supervision (BCBS), of which the United States is a participating member, has developed international regulatory capital standards through a series of capital agreements and related publications, which have collectively been in effect since 1988.

Basel III is a comprehensive set of reform measures, developed by the BCBS, to strengthen regulation, supervision and risk management of the banking sector. The measures include both liquidity and capital reforms.

Notably, in July 2013, the Federal Reserve Board finalized a rule to implement the Basel III capital rules in the United States, a package of regulatory reforms developed by BCBS.

The comprehensive package of reforms is designed to help ensure that banks maintain strong capital positions that will allow them to continue lending to creditworthy households and businesses, even after unexpected losses and during severe economic downturns.

This final rule increases both the quantity and quality of capital held by US banking organizations. The Council also published the Community Banking Organizations Reference Guide, which is intended to help small and non-complex banking organizations navigate the final rule and identify the changes most relevant to them.