After a year of some of the largest banking failures in U.S. history, new regulatory reform like Basel III Endgame aims to strengthen the banking sector by mandating higher capital requirements against bank assets. Such requirements could reduce available liquidity for consumers unless banks can transfer risk on loans to (re)insurers.
Capital requirements are legal percentages of equity that must be held alongside assets. This equity helps pay off debts and avoid defaults on loans. The collapse of Silicon Valley Bank was caused by a sudden mass withdrawal of bank depositors that depleted available capital, causing the bank to default as they lacked funds to payout all depositors. Higher capital requirements can, therefore, ensure a larger buffer for banks during future mass withdrawals.
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