While not exactly “too little, too late,” the outline of the proposal suggests that there is much more relevant and consequential work to be done.

First, there is little detail about much of anything in Barr’s speech. But to be clear, this proposal is primarily about fixes to old policy flaws that became apparent during the global financial crisis, which we are now just now getting around to implementing.  “The international agreement to implement these reforms was finalized more than five years ago, in 2017.”

Included in the “old business” is the following target: “With respect to risk-based requirements, the standards should be updated to better reflect credit, trading, and operational risk.” Not included in this list of risks are the risks that Barr will address later: “[He] will be pursuing further changes to regulation and supervision in response to the recent banking stress, including how we regulate and supervise liquidity, interest rate risk, and incentive compensation, as well as improving the speed, agility, and force of the Federal Reserve’s supervision.”

Second, the recalibration of capital requirements (“the proposal’s more accurate risk measures”), according to Barr, should be thought of “as equivalent to requiring the largest banks hold an additional 2 percentage points of capital.”

This “equivalence” is not precise enough to be of much use. How capital rule changes affect each bank will depend on how each “calibration” actually interacts with a bank’s risk selection. It may raise some banks’ requirements and reduce others’.

Still, the idea that the Fed’s initial impact analysis estimates a 2 percentage points increase in required equity for banks with over $100 billion in assets is not insignificant. Our universe includes 22 publicly traded banks with total assets over $100 billion that have a total of $9.95 trillion in RWAs. So, 2% represents $199 billion or about 13% of roughly $1.5 trillion in market cap. That’s not an insurmountable raise; but it is not insignificant in a relatively unfavorable banking environment (which we strongly believe we are in).

The most currently relevant upcoming change regards a partial fix to the existing regulatory flaw of ignoring unrealized losses in banks’ securities portfolios. Here, “the proposed adjustments would require banks with assets of $100 billion or more to account for unrealized losses and gains in their available-for-sale (AFS) securities when calculating their regulatory capital. This change would improve the transparency of regulatory capital ratios since it would better reflect banking organizations’ actual loss-absorbing capacity.”  The actual capital impact of including unrealized gains and losses on AFS securities for these few banks is insignificant in aggregate.

It’s true that this change will improve the transparency of regulatory capital ratios since it better reflects banking organizations’ actual loss-absorbing capacity. But is it not equally true of unrealized losses on so-called HTM securities? This is an area that needs to be and can be addressed without delay. In fact, it’s easy to distinguish for capital requirement purposes those unrealized losses in HTM securities that should be deducted from capital. Those are the losses associated with mortgage-backed securities that now have weighted average lives of over 7 years. These are the securities that no bank can attest to have the “ability” to hold to maturity.

Barr also noted that changes will end the practice of relying on banks’ own individual estimates of their own risk and instead use a more transparent and consistent approach. He notes that, “Experience suggests that banks tend to underestimate their credit risk because they have a strong incentive to lower their capital requirements.”  As an aside, I was at the FDIC when Basel decided that it would use banks’ credit risk and other modeling to determine capital requirements. I kept asking why we thought that banks wanted to hold the “right” amount of capital. It struck me then that this was a bad idea; but at that time, regulators were increasingly viewing banks as customers and clients instead of guarding appropriate boundaries in the relationship between regulator and regulated.  Around this time, we started “imbedding” resident examiners at the largest banks. Many of the examiners quickly became “captured” by the banks they were charged with supervising, and they even started referring to themselves and their bank charges as “we.”

Finally, this speech frustratingly points out how long common sense takes to work its way into capital regulations.