WASHINGTON—The Federal Reserve’s regulatory chief outlined steps to strengthen the financial cushions for larger banks, which he said would help boost the resilience of the system after a spate of midsize bank failures this year.
“Events over the past few months have only reinforced the need for humility and skepticism, and for an approach that makes banks resilient to both familiar and unanticipated risks,” Michael Barr, the Fed’s vice chair for supervision, said in a speech Monday.
The changes, which regulators are expected to propose this summer, come after what Barr described as a holistic review of big-bank capital requirements. Under the plan, large banks could be required to hold an additional 2 percentage points of capital, or an additional $2 of capital for every $100 of risk-weighted assets, he said.
Capital is the buffer banks are required to hold to absorb potential losses.
The precise amount of additional capital will depend on a firm’s business activities, with the biggest increases expected to be reserved for the largest, most complex U.S. megabanks, Barr said.
Banks will also face more difficult stress tests to gauge their ability to weather a hypothetical recession, tougher executive-compensation restrictions and heightened liquidity requirements, Barr said. He also plans to make changes to improve the “speed, agility, and force” of the Fed’s bank supervision.
The plan to beef up rules for Wall Street already has sparked pushback from the industry and its allies on Capitol Hill, who generally say the existing capital requirements are robust and allowed banks to emerge from the pandemic-triggered downturn in strong shape.
Tougher rules were already on the way for the biggest lenders before the March failures of Silicon Valley Bank and another bank sent tremors through the industry. Since then, regulators have said they plan to propose applying their toughest rules to banks with at least $100 billion in assets.
While regulators and legislators previously assumed the biggest risks to the financial system came from a handful of “too big to fail” banks, this year’s failures show that line of thinking was wrong, Barr said, calling into question the manner in which regulators calibrate their rules.
“It suggests that we need to be careful about thinking about contagion,” he said.
Coming changes include steps to end a regulatory reprieve that had allowed some midsize banks to effectively mask losses on securities they hold, a contributing factor in the collapse of SVB. Supporters of the change say it would have forced SVB to address its mounting losses earlier as interest rates began rising and the value of its holdings declined.
“Our recent experience shows that even banks of this size can cause stress that spreads to other institutions and threatens financial stability,” Barr said.
While the largest U.S. banks emerged from the pandemic in solid financial shape, Barr has signaled for months that he believes capital requirements should be higher.
Much of his overhaul revolves around the last piece of capital rules that global policy makers agreed to implement after the 2007-09 financial crisis. The overhaul forced banks around the world to boost their capital cushions in hopes of preparing them to weather downturns without taxpayer bailouts.
Banks must have loss-absorbing buffers to account for the risks tied to their activities, but regulators say the way firms now measure those risks varies too widely. The last step of the overhaul, expected to be proposed in the U.S. as soon as this month, is aimed at making measures of riskiness more transparent and comparable around the world.
In a move that is likely to disappoint big banks, Barr said he planned to make no fundamental changes to other parts of the capital framework to offset the new rules. Large banks have long called for easing a special surcharge that applies to global systemically important banks. Barr said he is only contemplating modest technical changes to those requirements.
Regulators also are preparing to expand the scope of a separate plan to add to regional banks’ financial cushions. An October proposal by the Fed and the Federal Deposit Insurance Corp. would have required the biggest banks to raise long-term debt that can help absorb losses if they become insolvent. Regulators now plan to propose a lower threshold, extending the requirements to all institutions with $100 billion or more in assets.
Write to Andrew Ackerman at andrew.ackerman@wsj.com