The news: Regional banks in the US and big banks in the EU face increased regulation and calls for higher capital reserves as a global recession sets in.
In the US: Anonymous sources have said regulations may be in the works that will require regional banks to increase their long-term debt to absorb potential losses in the event of an economic crisis, according to a Wall Street Journal report.
Industry trade groups are reportedly ready to push back on any regulation. Members of the Bank Policy Institute pointed out that the regulatory benefits are negligible compared to the cost to financial institutions and their customers.
Barr also hinted that capital reserve requirements may rise for larger banks, too. He acknowledged that they are currently strong, but also questioned if they are strong enough to weather a financial downturn.
In the EU: The European Central Bank (ECB) said that while eurozone banks have built up strong reserves over the past few years, and lenders stand to benefit from rising interest rates, they still must deal with a looming recession and astronomical energy prices.
Too medium-sized to fail: In June, after conducting its annual stress tests, the Fed concluded that banks are well positioned to weather a severe economic recession. The tests covered 34 banks and the Fed said the tests the banks underwent simulated the most extreme scenarios.
Running out of energy: Across the EU and the UK, banks are being warned to prepare for the worst as citizens brace for an 80% increase in energy bills as Russian retaliations to sanctions continue.
The big takeaway: Banks have been put in a confusing position. Their reserves appear to be strong, central banks globally are dialing up interest rates to rein in inflation, and the ECB is offering liquidity. Increased regulations just increase costs for banks and consumers, which seems to contradict their intent. Non-mega regional banks facing these costs might turn to mergers with each other to create efficiencies and help absorb some of these expenses.
This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.
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