Federal bank regulators are being urged by Senate Democrats led by Elizabeth Warren to implement stronger capital requirements

Following back-to-back congressional hearings in which officials testified about Silicon Valley Bank and Signature Bank failures, Senate Democrats are pushing federal banking regulators to tighten bank capital requirements.

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As a member of the Senate Committee on Banking, Housing, and Urban Affairs, Senator Elizabeth Warren of Massachusetts, is leading the effort to strengthen capital requirements for banks. She is aligning them with international guidelines known as Basel III.

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“We write to urge you to follow through with establishing strong capital requirements that protect consumers and taxpayers, and preserve the safety and soundness of our banking system,” Warren, along with Sens. According to a letter written by Richard Blumenthal, D-Conn., and Tammy Duckworth, D-Ill., dated Wednesday, the two senators are strongly in favor of strengthening capital requirements for banks.

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This letter was sent to the Vice Chair for Supervision of the Federal Reserve, Michael Barr, the Chairman of the Federal Deposit Insurance Corporation, Martin Gruenberg, and the acting Comptroller of the Currency, Michael Hsu. A Senate and House hearing was held this week during which Barr, who is heading up a comprehensive review of the SVB failure, and Gruenberg both testified before members of Congress.

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In their letter, the lawmakers pointed a finger at lobbyists and some Republicans for their efforts during the Trump administration to ease the capital requirements that were established following the 2008 financial crisis, which were abused by the lobbyists. A Republican lawmaker also claimed that in the days before the bank failures, GOP legislators were attempting to prevent regulators from enforcing stronger capital standards.

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In a letter sent to Fed Chair Jerome Powell on March 3, ten Republican lawmakers on the Senate Banking Committee criticized Barr's suggestion to increase capital requirements as "unfounded". After the letter was sent, SVB collapsed a few days later.

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In addition, the lawmakers warned against what they called "industry spin" that blamed the collapse of the banks on the oversight of regulatory agencies rather than lax banking regulations, rather than blaming the failure of the independent oversight agencies.

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“These industry officials are correct in their assessment that bank regulators’ failure to enforce strong capital requirements was a key factor in Signature and SVB's failure - but that does not negate the need for strong capital requirements,” they wrote.

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The senators also pointed to the Fed's March 2020 decision to simplify the capital rules for large banks as evidence that regulations are being dwindled down as a result. At the time, capital requirements for banking firms were determined based on supervisory stress tests, which were implemented as part of the "stress capital buffer" introduced at that time.

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It is expected that Warren, Blumenthal, and Duckworth will push regulators to fully implement Basel III, an international system of banking standards that will increase both the amount and quality of capital held by U.S. banking organizations. Additionally, the Federal Reserve has proposed a number of rules under Basel III designed to standardize minimum liquidity requirements for large and internationally active banks.

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The federal regulators have recommitted to implementing the standards by the end of September.

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The lawmakers urged regulators to enforce strong capital requirements to fend off aggressive lobbying from Wall Street and safeguard against more bank failures.

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“The failures of SVB and Signature, and the regulatory and supervisory failures that enabled its costly collapse, are directly tied to the big banks’ and Republican policymakers’ cynical efforts to weaken our regulatory framework,” the lawmakers wrote. “In order to prevent future bank crises and protect working Americans, I urge your agencies to quickly implement strong capital requirements and resist industry pressure to weaken or delay these requirements.”