Bloomberg is reporting this morning that the Federal Reserve is considering expanding its list of 19 banks that are subject to stringent capital requirements to include more small and mid sized banks. The Fed continues to demand that banks’ develop and prepare sound risk management policies, and will now be looking to monitor all banks with over $50 billion in assets.
More from Bloomberg, “Firms with assets of $50 billion or more would be required to conduct an exam, with boards showing Fed examiners how stock buybacks, dividends, earnings, and new regulations affect capital over several years, said the people, who declined to be identified because the proposal isn’t final. The Fed completed its first annual study of capital plans in March, clearing the way for firms such as Wells Fargo & Co. (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) to boost dividends.”
If the fed goes through with its implementation of stricter capital requirements for a more expansive list of banks, they risk squeezing the breath from an already near-lifeless sector. Banks are already set to face more new challenges from regulations that will restrict the amount they can charge merchants on debit card transactions (Dodd-Frank), as well as new rules from the Basel III committee and more oversight from the Federal Government. The banking sector has been notably weak this year, undershooting the S&P average by 2.5%
According to one source the Fed is “focusing on capital as the most important buffer against risk,” and Dino Kos (former executive vice president at the New York Fed) believes that this policy is being enacted to make sure a financial crisis is not repeated. According to Kos, “Nobody in the regulatory apparatus ever wants to do that again… The reviews should be extended to more banks because many need the discipline of looking at capital needs over longer time horizons. For the past 20 years, bankers have said, ‘We understand derivatives, we understand risk management, we understand risk controls.’ What regulators learned was, no, they don’t.”