A senior Federal Reserve official on Tuesday announced changes to a proposed package of U.S. banking regulations that would roughly halve the amount of additional capital the largest institutions will be required to hold.
The regulatory reform introduced in July 2023, known as the “Basel endgame,” would have increased capital requirements for the world’s largest banks by about 19 percent.
Instead, officials from the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have agreed to resubmit the sweeping proposal with a more modest 9 percent increase in capital requirements for large banks, according to prepared statements by Fed Vice Chairman for Central Bank Supervision Michael Barr.
The change came 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 warranted,” Barr said in his remarks. “Increasing capital requirements has advantages and disadvantages. The changes we propose to make will better balance these two important goals.”
The original proposal, a long-in-the-works response to the 2008 global financial crisis, aimed to increase safety and tighten oversight of risky activities such as lending and trading. But by increasing the amount of capital banks must hold as a buffer against losses, the plan could also have made loans more expensive or harder to obtain, leading to increased use by nonbanks, industry groups say.
The earlier version sparked cries of protest from industry executives, including JPMorgan Chase CEO Jamie Dimon led the industry's efforts to fight back against the demands, and now it appears those efforts have paid off.
But it is not just the big banks that benefit. Regional banks with assets between $100 billion and $250 billion are exempt from the latest proposal. However, they must include unrealized gains and losses on securities in their regulatory capital.
That portion will likely increase capital requirements by three to four percent over time, Barr said. It was an obvious response to the failures of midsize banks last year, which were caused by deposit runs related to unrealized losses on bonds and loans amid sharply rising interest rates.
Mortgages, personal loans
Key parts of the proposal that apply to large banks bring several risk metrics more in line with international standards, while the original draft was more burdensome for areas such as mortgages and personal loans, Barr said.
In addition, the risk weight for equity financing based on tax credits, which are often used to finance green energy projects, will be reduced, a premium proposed for companies with a history of operational failures will be mitigated, and the relatively lower-risk nature of investment management businesses will be taken into account.
Barr said he would push for a resubmission of the proposed Basel endgame rules and a separate set of capital surcharge rules for the largest global institutions, restarting a public review process that has already lasted more than a year.
That means the law won't be passed until long after the November election, raising the risk that the rules could be further weakened or not implemented at all if Republican candidate Donald Trump wins the election – a situation some regulators and lawmakers had actually wanted to avoid.
It is unclear whether the changes will satisfy the banking industry and its stakeholders; banks and their industry associations have already threatened legal action to prevent the implementation of the original draft.
“The road to improving capital requirements has been long since the global financial crisis, and Basel III Endgame is an important part of that effort,” Barr said. “The comprehensive and substantial changes to both proposals that I have outlined today would better balance the benefits and costs of capital.”
The reaction to Barr's proposal was swift and predictable; Senator Elizabeth Warren (D-Massachusetts) called it a gift to Wall Street.
“The revised capital standards for banks are a gift to Wall Street, increasing the risk of a future financial crisis and leaving taxpayers footing the bill for bailouts,” Warren said in an emailed statement. “After years of unnecessary delays, instead of strengthening the safety of the financial system, the Fed has caved in to lobbying by big bank executives.”
The American Bankers Association, an industry trade group, welcomed Barr's announcement but did not endorse the latest version of the regulation.
“We will carefully review this new proposal with our members, taking into account that American banks are already well capitalized and … any increase in capital requirements will continue to impose costs on the economy and will need to be adjusted accordingly,” said ABA President Rob Nichols.