Regional banks slide after Fed’s Kashkari advocates ‘significantly further’ capital regulation

Minneapolis Federal Reserve President Neel Kashkari favors getting tougher on regional banks, following a crisis earlier this year that he said may not be over.

Asked during a town hall whether he agrees with proposals setting higher capital requirements for banks with more than $100 billion in assets, the central bank official said, “My own personal opinion is it doesn’t go far enough. I think it’s a step in the right direction, but I would like to go significantly further.”

Regional bank shares fell as Kashkari spoke. The SPDR S&P Regional Banking ETF (KRE) was off 2.4% around midday.

The architect of the Troubled Asset Relief Program that helped bail out banks during the 2008 financial crisis, Kashkari said that if the Fed has to keep raising interest rates, it could cause more problems for smaller banks.

At the root of the crisis was duration risk. A crisis of confidence forced some banks to liquidate assets to meet withdrawal demand. Those banks holding longer-dated Treasurys faced capital losses as rates went up and bond prices fell.

Should the Fed have to keep raising rates, that could affect banks in the same situation. Kashkari did not indicate if he thought the Fed was positioned for more rate hikes, but he noted that “we’re a long way away from cutting rates.”

“Right now it seems like things are quite stable, that banks have gotten through this reasonably well,” he said. “Now, the risk is that if inflation is not completely under control, and that we have to raise rates further from here, to bring it down, that they might face more losses than they currently face today. And these pressures could flare up again in the future.”

Referring to the issues in March that took down Silicon Valley Bank and others, Kashkari replied “all of the above” when asked whether it was higher interest rates or bank mismanagement that caused the failures.