Davis Polk partner and Financial Institutions practice chair Randy Guynn was quoted in IFLR on proposals from the Federal Reserve to raise capital requirements for banks in the aftermath of recent bank failures.

The article explains that addressing the discrepancy between the U.S. standards and what is implemented elsewhere was considered a primary goal of the final Basel III framework, but the various capital-raising requirements proposed by the Fed could have the opposite effect.

Raising capital requirements beyond measure has it limits, and some argue it may never make banks fully immune to failure. “No reasonable amount of capital will make a bank invulnerable,” Randy explained. “If its managers make disastrous decisions about interest rate or other risks that result in the destruction of a substantial portion of its assets, the deposit runs will happen, because it’s rational to run in that situation.”

“US capital requirements proposal at odds with EU rules,” IFLR (July 25, 2023) (subscription required)

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