Senate Democrats led by Elizabeth Warren are urging federal bank regulators to introduce tighter capital requirements

Senator Elizabeth Warren, a Democrat from Massachusetts, questions Federal Reserve Gov. Lael Brainard (not pictured) during a hearing of the Senate Committee on Banking, Housing and Urban Affairs Thursday, January 13, 2022 in Washington, DC.

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WASHINGTON — Senate Democrats are urging federal banking regulators to tighten capital requirements for banks after back-to-back congressional hearings at which officials testified about the failures Silicon Valley Bank And signature bank.

Senator Elizabeth Warren, D-Mass., member of the Senate Committee on Banking, Housing and Urban Development, is leading calls for strengthening banks’ capital requirements by aligning them with the international “Basel III” framework.

“We are writing to urge you to implement strict capital requirements that will protect consumers and taxpayers and preserve the safety and soundness of our banking system,” Warren said along with Sens. Richard Blumenthal, D-Conn., and Tammy Duckworth, D-Ill ., wrote in a letter on Wednesday.

The letter was sent to Federal Reserve Vice Chairman for Oversight Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Acting Comptroller of the Currency Michael Hsu. Barr, who is leading a comprehensive review of the SVB’s failure, and Gruenberg both testified at hearings before the Senate and House legislatures this week.

In the letter, lawmakers blamed lobbyists and some Republicans for efforts during the Trump administration to relax capital requirements set after the 2008 financial crisis. They also said GOP lawmakers were urging regulators “to fend off tighter capital standards in the days before the banks collapsed.”

Ten Republican lawmakers on the Senate Banking Committee called Barr’s Proposal to increase capital requirements “unfounded” in a March 3 letter to Fed Chair Jerome Powell. The SVB collapsed a few days after the letter was sent.

Lawmakers also warned of what they dubbed an “industry spin,” which attributes the bank’s collapse to oversight from regulators rather than lax banking rules.

“These industry representatives are correct that failures in banking regulation are a key reason for the failure of Signature and SVB – but this does not preclude the need for strict capital requirements,” they wrote.

The senators also cited the Fed’s March 2020 decision to simplify capital rules for large banks as evidence of rule usage. With the “stress capital buffer” implemented at that time, the capital requirements for banking companies are determined annually using supervisory stress tests.

Warren, Blumenthal and Duckworth are pushing for full implementation by regulators Basel III, a set of international regulatory standards for banks that would increase both the amount and quality of capital held by US banking organizations. The Fed has also proposed rules to standardize minimum liquidity requirements for large and internationally active banking firms under Basel III.

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Federal regulators recommitted implementation of the standards in September.

Lawmakers urged regulators to enforce strict capital requirements to ward off aggressive Wall Street lobbying and protect themselves from further bank failures.

“The failures of SVB and Signature, and the regulatory and regulatory failures that enabled their costly collapse, are directly related to the cynical efforts of big banks and Republican politicians to weaken our regulatory framework,” the lawmakers wrote. “To prevent future banking crises and protect working Americans, I urge your authorities to implement strict capital requirements quickly and resist industry pressure to weaken or delay those requirements.”

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