New requirements for banks in the USA: How much will stability cost?

New requirements impose rigorous capital rules on regional banks based on Basel III standards, the global implementation cost of which is estimated at 90 billion euros, intended to directly prevent scenarios similar to the collapse of Silicon Valley Bank. The American banking system is in a phase of deep transformation, where regulators no longer accept lenient treatment for smaller institutions. The sector is undergoing a forced recalibration, shifting the weight from aggressive expansion to building capital safety buffers.

A paradigm shift in banking supervision

For years, American regional banks operated under a specific supervisory regime that treated them as entities of lesser systemic importance. This operational freedom, allowing for more flexible asset and liability management, however, became a source of threats that were revealed in 2023. The collapse of Silicon Valley Bank was a signal that underestimating liquidity risk combined with rising interest rates could destabilize even a solid-looking balance sheet. Regulators in Washington decided that the existing approach based on trust in internal risk management models required correction.

The introduction of Basel III standards for a wider group of institutions marks the end of an era in which smaller banks could avoid the most restrictive capital requirements. This standard was designed after the 2008 financial crisis with global giants in mind, which had to prove their ability to survive in extremely adverse market conditions. Shifting this burden onto regional banks is a logistical and financial operation of a massive scale. The cost of implementing these requirements, estimated globally at 90 billion euros, reflects the scope of changes in IT systems, reporting methods, and the necessity of raising additional equity capital.

For bank boards, this means the necessity of giving up a portion of dividends or issuing new shares to meet capital ratios such as CET1 (Common Equity Tier 1). This is the highest quality capital, intended to serve as the first line of defense against credit losses. The previous approach, based on profit optimization, is giving way to a risk minimization strategy. Banks that do not adapt to the new requirements by the deadline may be subject to supervisory sanctions, which in practice means a loss of investor and depositor confidence.

The mechanics of Basel III vs. market reality

Basel III standards are based on several pillars, the most important of which is increasing the resilience of banks to external shocks. A key element is the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). LCR forces the maintenance of high-quality liquid assets that can be easily liquidated during periods of financial stress. NSFR, on the other hand, is intended to ensure that banks finance their long-term assets with stable sources of liabilities, avoiding reliance on short-term, volatile wholesale funding.

Implementing these requirements for regional banks is a difficult process because these institutions often specialize in financing specific sectors of the economy, such as commercial real estate or local businesses. Every change in the risk weight for these assets directly translates into the amount of capital a bank must hold in reserve. If the regulator raises requirements for a given asset class, the bank automatically becomes less willing to grant loans in that area, unless it raises the margin to compensate for the higher cost of capital.

The relationship between capital and credit is linear and relentless. As "Obserwator Finansowy" analyzed as early as 2015, a strong capital base is a necessary condition for healthy lending. However, in practice, when capital requirements grow faster than a bank's ability to generate profits, banks become more selective. As a result, the availability of credit for small and medium-sized enterprises may be limited, which poses a serious challenge for local economies in the USA. This phenomenon creates space for alternative capital providers, which, however, is not always beneficial for the stability of the entire system.

Historical context and past mistakes

It is worth looking at how the approach to asset quality has evolved in recent decades. As early as 2017, reports indicated that the largest global banks had achieved full compliance with Basel III standards, which made them much more resilient to shocks than in 2008. However, smaller regional banks in the USA still operated on the margins of these regulations. The lack of a requirement for rigorous market and liquidity risk reporting meant that at the moment of a sharp rise in interest rates, many of them were not prepared for the decline in the value of treasury bond portfolios.

The problem of bad debt is not new and has paralyzed economies many times before. In 2016, "Obserwator Finansowy" drew attention to the situation in Europe, where bad loans overwhelmed bank balance sheets, limiting their ability to finance economic growth. American financial supervision is now trying to avoid a similar scenario by introducing proactive regulations. Today's actions by the Federal Reserve are a direct lesson from history: if banks do not hold sufficient capital in case of losses, then in crisis situations, the burden of saving the system will fall on taxpayers.

Contemporary data, including information on record write-offs for non-performing loans from October 2023, confirm that the quality of credit portfolios in American banks is deteriorating. This results from higher debt service costs for borrowers, which is a direct consequence of the Fed's monetary policy. In this environment, the introduction of higher capital requirements is seen by regulators as a necessary brake intended to prevent excessive risk-taking in conditions of economic slowdown.

The role of fintechs in the new regulatory environment

The withdrawal of traditional banks from risky credit segments opens doors for the fintech sector. As early as 2016, the potential of these companies to fill the credit gap for the SME sector was analyzed. Today, as regional banks are forced to tighten their belts, technology companies offering loans are becoming a real alternative. They use advanced risk assessment algorithms, which often allow for faster and more precise verification of creditworthiness than traditional banking procedures.

However, it should be remembered that fintechs are not subject to the same capital rigors as commercial banks. Their business model is often based on distributing risk to external investors, which means that in the event of a deep economic crisis, their resilience may be significantly lower. If regional banks become mere depositories and the entire credit market is taken over by less regulated entities, a so-called "shadow banking system" may emerge. This is a situation where systemic risk does not disappear but shifts to areas that supervision is unable to fully control.

For an entrepreneur seeking financing, this change means higher costs. Fintechs, despite their flexibility, usually offer more expensive capital than traditional banks, including higher operational risk in their margins. From the perspective of the economy, this is the cost of transitioning to a more stable but also less accessible financing system. Will this compromise prove durable? The answer depends on how quickly regional banks adapt to the new requirements and whether they will be able to optimize their operating costs to remain competitive against technology players.

The Federal Reserve and management challenges

Jerome Powell, Chairman of the Federal Reserve, has repeatedly emphasized the importance of strong capital foundations. In the current regulatory reality, the Fed focuses on forcing banks to manage interest rate risk more conservatively. The collapse of Silicon Valley Bank showed that even banks with huge amounts of cash can fail if their assets are poorly matched to the maturity structure of deposits. New regulations aim to eliminate these types of errors by imposing rigid frameworks for liquidity risk management.

The challenges facing bank boards go beyond mere compliance with regulations. They must change the organizational culture, where the priority becomes balance sheet safety, not just short-term profit. For many directors in regional banks, this is a difficult lesson. Accustomed for years to an environment of low interest rates, they must now function in conditions where every error in liquidity forecasts can lead to serious capital consequences.

Implementing Basel III standards is a multi-year process. The first stage is adjusting reporting systems, the second is injecting capital, and the third is full integration with the bank's decision-making processes. Each of these stages generates costs that ultimately burden financial results. In the coming years, we will witness consolidation in the regional banking sector. Smaller institutions, unable to bear the costs of compliance, will likely be taken over by larger banks that already possess the appropriate regulatory infrastructure. This will lead to further concentration of capital in the banking sector.

Prospects for the banking sector until 2027

Forecasting the future of the banking system in the face of such deep changes requires caution. By 2027, the market will already have the first full data on the impact of the new requirements on the return on equity (ROE) in regional banks. If ROE falls below the cost of capital, banks may have difficulty attracting new investors, which will further weaken their ability to support the economy. On the other hand, if higher capital buffers truly eliminate the risk of a bank run, this could lead to a permanent reduction in the risk premium in the sector.

A key element will also be the way regulators interpret the regulations in practice. Basel III provides some leeway regarding risk weights for individual assets. If supervision is too rigorous, it could lead to a "freeze" of loans for the real estate sector, which is particularly important in the USA due to the high exposure of regional banks to office buildings. In this context, supervisory flexibility will be just as important as the regulations themselves.

It is also worth noting the global dimension of these changes. The USA does not operate in a vacuum. By implementing Basel III standards, the American system is becoming similar to the European or Japanese ones, which facilitates the comparability of banks at the international level. This is a positive phenomenon for global stability, but it increases pressure on American institutions, which until now enjoyed greater freedom. As a result, the global banking sector is becoming more uniform in terms of capital requirements, which is theoretically intended to limit regulatory arbitrage.

Impact on retail and institutional clients

For the average bank client, these changes primarily mean higher deposit security. The increase in capital requirements means that the chance of a bank failure in crisis conditions decreases significantly. This is a direct benefit, for which, however, one will have to pay in the form of higher account maintenance fees or lower interest rates on deposits. Banks will try to pass some of the costs of implementing the regulations onto their clients to protect interest margins.

Institutional clients, including large corporations, will feel the change in the availability of revolving and investment loans. Banks may become more demanding regarding collateral and value credit risk higher. This may lead to a situation where companies with lower credit ratings will have to seek financing in the corporate bond market, which is a more expensive and formally demanding process.

For stock market investors, regional banks are ceasing to be growth companies and are beginning to be perceived as so-called "utility stocks" – that is, stable but low-profit entities paying out constant dividends. This change in market perception is inevitable in the new regulatory regime. Investors will have to get used to the fact that banks now operate in an environment where the main goal is survival and stability, not aggressive growth.

Summary of changes

The new landscape of banking in the USA is the result of a difficult compromise between economic growth and system safety. Basel III standards, although expensive, are the price the sector is paying for the mistakes of the past. The key challenge remains finding a balance where capital requirements do not stifle innovation and credit availability.

In the coming years, we will witness a transformation that will ultimately define whether regional banks in the USA will remain pillars of the local economy or be absorbed by financial giants. System stability is the foundation upon which trust is built, and without trust, no market can function effectively. Although the implementation costs are huge, the alternative in the form of an uncontrolled crisis of confidence would be much more costly for the entire society.

Questions and answers

Why must regional banks now meet higher requirements?

Regulators are introducing these changes to increase the resilience of smaller financial institutions to market shocks and prevent liquidity crises, such as the one that led to the collapse of Silicon Valley Bank.

Will the new regulations affect the availability of loans?

Yes, the tightening of capital requirements forces banks to take a more selective approach to lending. This may lead to higher costs of loans for small and medium-sized enterprises or the necessity of seeking financing in the fintech sector.

What are the costs of implementing the new rules?

The estimated cost of implementing the full phase of Basel III standards on a global scale is 90 billion euros. This amount includes investments in reporting infrastructure, adjustment of risk management models, and the necessity of recapitalizing banks.

What is the Federal Reserve's position on these changes?

The Federal Reserve aims to unify the supervision of the banking sector, placing greater emphasis on interest rate and liquidity risk management in regional banks, which is intended to ensure greater stability of the financial system as a whole.

What does the "end of the era of romanticism" in finance mean?

This phrase refers to the departure from the loose approach to regulation and the lack of restrictive supervision that dominated the banking sector for many years. The new reality requires banks to strictly adhere to capital standards and abandon aggressive financial leverage in favor of balance sheet safety.

Sources

Article prepared by the Wiadomości PRO editorial team with the support of artificial intelligence. Facts are derived from the sources listed above.