Top Federal Reserve official on Tuesday was revealed changes to a proposed set of US banking regulations that roughly halve the extra capital the largest institutions will be forced to hold.
The regulatory overhaul introduced in July 2023, known as Basel Endgame, would have boosted capital requirements for the world’s biggest banks by around 19%.
Instead, Fed officials, the Office of the Controller of the Currency and the Federal Deposit Insurance Corp. agreed to resubmit the massive proposal with a more modest 9% increase in the capital of the big banks, observations by Fed Vice Chairman for Supervision Michael Barr.
The change comes after banks, business groups, lawmakers and others weighed the potential impact of the original proposal, Barr told an audience at the Brookings Institution.
“This process has led us to conclude that broad and substantial changes to the proposals are required,” Barr said in remarks. “There are benefits and costs to raising capital requirements. The changes we plan to make will bring these two important goals into better balance.”
The original proposal, a long-term work answer in the global financial crisis of 2008, it sought to strengthen security and strengthen supervision of risky activities, including loans and transactions. But by draining the capital banks are required to hold as a cushion against losses, the plan could also make loans more expensive or harder to obtain, pushing more activity to non-bank providers, according to trade groups.
The earlier version drew howls of protest from industry executives including JPMorgan Chase CEO Jamie Dimon, who helped lead the industry efforts to push back demands. Now, it seems those efforts have paid off.
But the big banks aren’t the only ones benefiting. Regional banks with between $100 billion and $250 billion in assets are exempt from the latest proposal, except for the requirement to recognize unrealized securities gains and losses in their regulatory capital.
That part will likely boost capital requirements by 3% to 4% over time, Barr said. It is an apparent response to failures last year by mid-sized banks caused by deposits linked to unrealized losses on bonds and loans amid much higher interest rates.
Mortgages, retail loans
Key parts of the proposal that apply to big banks bring several risk measures more in line with international standards, while the original draft was more onerous on things like mortgages and retail loans, Barr said.
It also reduces the risk weighting of capital tax credit financing structures, which are often used to finance green energy projects. mitigates a surcharge proposed for firms with a history of operational failures; and recognizes the relatively lower risk nature of investment management transactions.
Barr said he would push to resubmit the proposed Basel Endgame regulations, as well as a separate set of capital-raising rules for the largest global institutions, which restarts a public review process that has already taken more than a year.
That means it won’t be finalized until well after the November election, which creates the risk that if a Republican nominee Donald Trump wins, the rules could be further weakened or never implemented, a situation some regulators and lawmakers hoped to avoid.
It is unclear whether the changes appease the industry and their constituents. banks and their trade groups have threatened legal action to prevent the original plan from being implemented.
“The journey to improve capital requirements since the Global Financial Crisis has been a long one, and the Basel III Endgame is an important element of that effort,” Barr said. “The broad and substantive changes to both proposals I’ve outlined today will better balance the benefits and costs of capital.”
The reaction to Barr’s proposal was swift and predictable. Sen. Elizabeth Warren, D-Mass., called it a gift to Wall Street.
“Revised bank capital standards are a gift to Wall Street, increasing the risk of a future financial crisis and keeping taxpayers on the hook for bailouts,” Warren said in an emailed statement. “After years of needless delay, instead of strengthening the safety of the financial system, the Fed has caved in to the lobbies of big bank executives.”
The American Bankers Association, a trade group, said it welcomed Barr’s announcement but stopped short of endorsing the latest version of the regulation.
“We will carefully consider this new proposal with our members, recognizing that America’s banks are already well capitalized and … any increase in capital requirements will still have a cost to the economy and must be adjusted accordingly,” said ABA president Rob Nichols. .
