Decline in Regional Bank Shares as Fed’s Kashkari Pushes for Substantial Capital Regulation Enhancements

Minneapolis Federal Reserve President Neel Kashkari is advocating for stricter measures concerning regional banks in the aftermath of an ongoing crisis that he believes may not have fully subsided. In a recent town hall session, Kashkari was asked about his stance on proposals advocating for higher capital requirements for banks with assets exceeding $100 billion. Expressing his personal view, the central bank official stated, “In my own opinion, the proposed measures fall short. While they represent a step in the right direction, I will push for considerably more substantial reforms.” Kashkari’s remarks prompted a decline in the shares of regional banks, with the SPDR S&P Regional Banking ETF (KRE) experiencing a 2.4% decline around midday. Having played a key role in designing the Troubled Asset Relief Program during the 2008 financial crisis, Kashkari voiced concerns that further interest rate hikes by the Federal Reserve could exacerbate challenges for smaller financial institutions.

The ongoing crisis is rooted in duration risk, where some banks were compelled to liquidate assets due to a crisis of confidence and heightened withdrawal demands. Banks holding longer-term Treasury bonds faced capital losses as interest rates increased, leading to lower bond prices. If the Federal Reserve continues to raise rates, this could impact banks in similar situations. Kashkari refrained from predicting the Federal Reserve’s rate hike trajectory but noted that the possibility of rate cuts remains distant. While stability currently prevails, with banks having managed the situation relatively well, Kashkari cautioned that uncontrolled inflation requiring further rate hikes could subject banks to greater losses than those currently faced. Such pressures could resurface in the future. Regarding the events in March that precipitated the downfall of institutions like Silicon Valley Bank, Kashkari indicated that elevated interest rates and potential bank mismanagement played contributory roles. It’s important to note that the Minneapolis Fed doesn’t independently formulate bank regulatory policies; instead, it adheres to broader central bank policies. A report prepared earlier this year by Michael Barr, the Fed’s Vice Chair for Supervision, highlighted managerial deficiencies in the Silicon Valley Bank collapse while also noting supervisory oversights.