The Federal Reserve has unveiled plans that would massively scale back a proposal to raise capital requirements for banks after politicians and the banking industry walked back the original plan, warning it could restrict lending and hurt the economy.
The new proposal would increase capital levels for major banks like JPMorgan Chase (JPM) and Bank of America (BAC) by a total of 9%, down by half from the original plan more than a year ago, which called for the capital increase was determined at approximately 19%. for those institutions.
Banks with assets between $100 billion and $250 billion, which were initially subject to the stricter standards of the largest banks, would also no longer be subject to the increases, except for the requirement to include unrealized gains and losses from their securities portfolios in regulatory capital. acknowledge. . This is a major turnaround from the series of regional bank failures caused by the Silicon Valley bank last year.
“Capital also comes with costs,” Michael Barr, the Fed’s vice chairman for supervision, said Tuesday at an event in Washington hosted by the Brookings Institution. “Compared to debt, capital is a more expensive source of financing for the bank. Higher capital requirements can therefore increase the cost of funding for a bank, and the bank can pass on higher costs to households, businesses and customers engaged in a range of financial activities.”
The new version of this plan, known as Basel III Endgame, comes after months of anticipation, after Fed Chairman Jay Powell said back in March that the central bank was seeking “broad material changes” to the original proposal and was looking for a consensus . of the Federal Reserve Board.
When it was first released more than a year ago, the capital plan was met with immediate disagreement and division among Fed officials, who wondered whether the plan in its original form could actually do more harm than good.
Fed Governor Michelle Bowman argued that the plan needed “substantial changes” and that increasing capital requirements on the scale proposed by regulators could significantly harm the economy. Fed Governor Chris Waller also argued that the plan needed a major overhaul.
Barr said the changes reflect feedback the Fed has received from the public and improve the proposal’s layering and better reflect risks. In his speech, he emphasized that the new plans are far from final and that the Fed, along with the Office of the Comptroller for the Monet and the FDIC, “have not yet made final decisions on any aspect of the reproposals, including . explicitly addressed in the reproposal.”
“This is an intermediate step,” he said.
The comment period, which was initially set for November 30 last year after being proposed in July 2023, was extended until January 2024 after the banks submitted letters to the Fed listing the many problems they had with the rules, along with a aggressive lobbying effort.
One of the biggest concerns is that the Fed’s proposed capital requirements would make the costs of various banking activities, from residential mortgages and small business lending to trading, more expensive, with such dynamics potentially embedding higher costs into economic activity.
JPMorgan CEO Jamie Dimon even argued that the capital plan could cause inflation to rise due to increasing capital requirements for hedging, which will trickle down to consumers in the form of higher prices for everything from a can of soda to meat products.
The proposed changes unveiled Thursday are part of an effort by banking regulators to follow up on the U.S. version of an international accord known as Basel III, developed by the Basel Committee on Banking Supervision.
The goal of the Basel Committee – convened by the Bank for International Settlements in Basel, Switzerland – was to set global capital standards so that banks would have sufficient reserves to cover unforeseen losses and survive crises.
Banking regulators in the US, Britain and Europe began rolling out the latest version of this agreement after the 2007 to 2009 global financial crisis. This was agreed to in 2017, but in the US the proposal was delayed by the COVID-19 pandemic.
Europe and Britain have both made progress in implementing single-digit capital buffer increases and are now in the implementation phase.
Bar also said the Fed is looking at major bank stress tests, another measure of how regulators set capital buffers for banks in the event of severe market shocks.
“We are attentive to the interactions between all components of our capital framework and the combined burdens and benefits, and we take these issues seriously,” Barr added.
While the revised plans may not be final, they will play an important role in overall bank profits and the extent to which lenders can return capital to shareholders.
“That will be an important factor as we think about how much more we want to do and when, in terms of [stock] buybacks,” Citigroup CFO Mark Mason said Monday at a conference in New York.
If the full reproposal comes out in September, “we expect banks to comment during October earnings calls on how much their excess capital will increase versus the current rule,” Morgan Stanley analyst Betsy Graseck said in a Tuesday note.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other financial areas.
Jennifer Schonberger is an experienced financial journalist who covers markets, the economy and investing. At Yahoo Finance, she covers the Federal Reserve, cryptocurrencies and the intersection of business and politics. Follow her on X @Jenniferisms.