A top Federal Reserve official said this on Tuesday revealed changes to a proposed set of U.S. banking rules that would roughly halve the additional capital the largest institutions will be forced to hold.
The regulatory overhaul introduced in July 2023, known as the Basel Endgame, would have increased capital requirements for the world’s largest banks by around 19%.
Instead, officials from the Fed, the Office of the Comptroller of the Monet and the Federal Deposit Insurance Corp. agreed to resubmit the huge proposal with a more modest 9% increase in the capital of major banks, according to prepared US investigators. comments from Fed Vice Chairman for Supervision Michael Barr.
The change comes after banks, business groups, lawmakers and others weighed in on 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 material changes to the proposals are warranted,” Barr said in the comments. “There are benefits and costs to increasing capital requirements. The changes we plan to make will better balance these two important objectives.”
The original proposal had been in the works for a long time answer until the 2008 global financial crisis, sought to increase security and tighten supervision of risky activities, including lending and trading. But by raising the capital that banks must hold as a cushion against losses, the plan could also have made loans more expensive or harder to obtain, shifting more business to non-bank providers, according to trade groups.
The earlier version sparked protests from industry executives and others JPMorgan Chase CEO Jamie Dimon, who helped lead the industry attempts to resist the demands. Now it seems those efforts have paid off.
But the big banks are not the only ones benefiting from this. Regional banks with between $100 billion and $250 billion in assets are excluded from the latest proposal, except for the requirement that they include unrealized gains and losses on securities in their regulatory capital.
That portion will likely increase capital requirements by 3% to 4% over time, Barr said. It is a clear response to the failure of mid-sized banks last year, caused by deposit runs linked to unrealized losses on bonds and loans at sharply higher interest rates.
Mortgages, private loans
Key parts of the proposal that apply to large banks bring several risk measures more in line with international standards, while the original draft was more onerous for things like mortgages and retail lending, Barr said.
It also reduces the risk weight for tax credit financing structures, which are often used to finance green energy projects; softens a surcharge proposed for companies with a history of operational failures; and recognizes the relatively lower risk nature of investment management activities.
Barr said he will push for the resubmission of the proposed Basel Endgame regulations, as well as a separate set of rules for capital allowances for the largest global institutions, restarting a public review process that has dragged on for more than a year.
That means the law won’t be finalized until well after the November election, raising the risk that if Republican candidate Donald Trump wins, the rules could be further weakened or never implemented, a situation that worries some regulators and lawmakers hoped to avoid.
It’s unclear whether the changes will satisfy the industry and their constituents; banks and their trade groups have threatened to litigate to prevent implementation of the original draft.
“The journey to improve capital requirements since the global financial crisis has been long, and Basel III Endgame is an important part of this effort,” Barr said. “The broad and material changes in both proposals that I outlined today would better balance the benefits and costs of capital.”
The response to Barr’s proposal was swift and predictable; Sen. Elizabeth Warren, D-Mass., called it a gift to Wall Street.
“The revised capital standards for banks are a giveaway from Wall Street, increasing the risk of a future financial crisis and leaving taxpayers on the hook for bailouts,” Warren said in an emailed statement. “After years of needless delays, instead of strengthening the security of the financial system, the Fed has caved to the lobbying efforts of major bank executives.”
The American Bankers Association, a trade group, said it welcomed Barr’s announcement but did not endorse the latest version of the regulation.
“We will carefully discuss this new proposal with our members, recognizing that US banks are already well capitalized and… any increase in capital requirements will still impose costs on the economy and must be appropriately tailored ” said ABA President Rob Nichols. .