Senate Democrats led by Elizabeth Warren press federal bank regulators to implement stronger capital requirements

WASHINGTON — Senate Democrats are pressing federal banking regulators to toughen bank capital requirements following back-to-back congressional hearings where officials testified about the failures of Silicon Valley Bank and Signature Bank.

Sen. Elizabeth Warren, D-Mass., a member of the Senate Committee on Banking, Housing and Urban Affairs, is leading the calls to strengthen capital rules for banks by aligning with the international "Basel III" framework.

"We write to urge you follow through with establishing strong capital requirements that protect consumers and taxpayers, and preserve the safety and soundness of our banking system," Warren, along with Sens. Richard Blumenthal, D-Conn., and Tammy Duckworth, D-Ill., wrote in a letter dated Wednesday.

The letter was sent to Federal Reserve Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and acting Comptroller of the Currency Michael Hsu. Barr, who is leading a comprehensive review of the SVB failure, and Gruenberg both testified at hearings before Senate and House lawmakers this week.

In the letter, the lawmakers blamed lobbyists and some Republicans for efforts during the Trump administration to ease capital requirements established after the 2008 financial crisis. They also said GOP lawmakers were pushing regulators "to stave off stronger capital standards in the days before the bank failures."

Ten Republican lawmakers on the Senate Banking Committee called Barr's suggestion to increase capital requirements "unfounded" in a March 3 letter to Fed Chairman Jerome Powell. SVB collapsed several days after they sent the letter.

The lawmakers also warned against what they called "industry spin" that blames the bank collapses on the oversight of regulatory agencies rather than lax banking regulations.

"These industry officials are right that bank regulators' failures are a key part of the reason that Signature and SVB failed – but this does not obviate the need for strong capital requirements," they wrote.

The senators also pointed to the Fed's March 2020 decision to simplify capital rules for large banks as evidence of a drawdown of regulations. Under the "stress capital buffer" implemented at the time, the capital requirements for banking firms is determined annually according to supervisory stress tests.

Warren, Blumenthal and Duckworth are pushing for regulators to fully implement Basel III, a set of international regulatory standards for banks that would increase both the amount and quality of capital held by U.S. banking organizations. The Fed has also proposed rules to standardize minimum liquidity requirements for large and internationally active banking firms under Basel III.

Federal regulators recommitted to implementing the standards in September.

The lawmakers urged regulators to enforce strong capital requirements to fend off aggressive lobbying from Wall Street and safeguard against more bank failures.

"The failures of SVB and Signature, and the regulatory and supervisory failures that enabled its costly collapse, are directly tied to the big banks' and Republican policymakers' cynical efforts to weaken our regulatory framework," the lawmakers wrote. "In order to prevent future bank crises and protect working Americans, I urge your agencies to quickly implement strong capital requirements and resist industry pressure to weaken or delay these requirements."

A Federal Reserve spokesperson told CNBC that the central bank received the letter and plans to respond.

The FDIC and the Office of the Comptroller of the Currency did not immediately respond to requests for comment.