Washington is in a generous mood toward its banks. In March, federal regulators unveiled a major overhaul of capital requirements (the financial buffers banks must maintain to absorb losses in tough times), and the headlines wrote themselves: deregulation, relief, billions freed up for loans and buybacks. The proposal would reduce capital requirements for the largest Wall Street firms by nearly 5%.
The Federal Reserve estimated that about $20 billion in capital could be freed up for the eight largest banks alone. Michael Barr, the Fed’s former vice chairman for supervision, put the figure even higher, warning that the total could reach $60 billion if all related changes are included.
Why this is important: Bank stability depends less on reported capital and more on what markets think is actually there. If unrealized losses remain on balance sheets, trust can break faster than regulations can respond, turning a technical accounting problem into a liquidity crisis.
But something unexpected emerges when you read the fine print. Regulators have made one specific exception: certain large regional banks would be required to start accounting for unrealized losses on their books, a change directly tied to the collapse of Silicon Valley Bank in 2023. This provision, largely overlooked in covering the broader rollback, amounts to a regulatory go-ahead.
To understand why, you need to understand what an ‘unrealized loss’ actually is for banks. Imagine buying a ten-year government bond for $100. Interest rates then rise sharply, new bonds now pay more, making your bonds less attractive as the market value falls to, for example, €80.
Even though you didn’t sell anything and didn’t lose any money, that means you’ve now suffered a $20 loss, unrealized and invisible to most financial scorecards.
For years, mid-market banks were allowed to exclude these paper losses from the capital figures they reported to regulators, as if the gap between market value and book value did not exist.
How Silicon Valley Bank’s Unrealized Losses Caused a Bank Run in 2023
The collapse of Silicon Valley Bank was the result of something much more mundane than fraud or reckless lending: a portfolio of perfectly legal long-term bond investments that lost much of their value when interest rates rose.
We started to see the first signs of a crisis in early March 2023, when SVB announced a $1.8 billion loss on securities sales, a direct result of those unrealized losses, in addition to a plan to raise $2 billion in fresh capital.
Shares fell 60% the next day as uninsured savers began withdrawing their assets en masse; By that evening, $42 billion had left the bank, while another $100 billion would be withdrawn by morning.
Nearly 30% of the deposits evaporated within hours. The SVB was killed by panic, and the panic was caused by the losses that had been there for a while and suddenly became visible.
The bank’s capital appeared substantially more adequate than it actually was, given that almost none of its regulators, depositors, or investors could estimate the true extent of the unrealized securities losses.
Under the rules in force at the time, SVB had exercised a legal and publicly available option, by simply refraining from including these losses in its reported capital figures, a decision that turned out to be catastrophic.
Meanwhile, banks that had to reflect unrealized losses in their regulatory capital were considerably more careful with their interest rate risk. The lesson from the SVB is that hiding losses of this magnitude guarantees that no one will take action until it is too late.
Why the new bank capital rules still require regional banks to report unrealized losses
That brings us back to the current proposal. The change requiring large regional banks to take into account unrealized losses will increase their capital requirements by 3.1%, although their total capital is still expected to fall by 5.2% when all pending changes are taken into account.
Banks with assets of less than $100 billion do not have to meet such a requirement, and their capital is expected to decline further. The message we get from this is clear: the problem was real, and it was real on a specific scale. The exception is that Washington, in its trademark bloodless bureaucratic language, says that the collapse of the SVB was due to poor regulation.
Barr, who left his role as vice chairman earlier this year rather than be fired by the Trump administration but retained his seat on the Fed board, has spoken out on the matter. In a formal dissent, he warned that capital requirements are being significantly reduced, that liquidity requirements could also be reduced, that the Federal Reserve’s supervisory staff has been cut by more than 30%, and that the banking industry is built on trust.
That last sentence deserves attention. A bank can survive deteriorating accounting until the people whose money is in it no longer believe in it.
Proponents of the broader rewrite have a reasonable argument. The original 2023 Basel proposal was widely seen as overcalibrated, a blunt instrument that pushes risk out of the regulated system into the shadows rather than actually reducing it. Fed Governor Michelle Bowman said capital will remain robust and the new framework now better reflects requirements and actual risk.
But the breakdown of unrealized losses survives even within the loose framework. If the problem were truly solved, if maturity risk and depositor confidence were no longer the market’s concerns, there would be no reason to maintain the provision. Supervisors do not impose expensive requirements out of nostalgia.
The temptation is great to see the new proposal as outright deregulation. But the more precise interpretation is also the more interesting. Even as Washington bails out the banks, it is quietly perpetuating a single hard lesson from the SVB: that when rates rise and losses pile up, what a bank is actually sitting on still matters, whether the rules say so or not.