The Federal Reserve has revised its proposed capital requirement increase for large U.S. banks, reducing the originally proposed hike significantly following opposition from the banking industry and political figures from both sides of the aisle.
Michael Barr, vice chair for supervision at the Federal Reserve, announced the softened terms in a speech on Sept. 10 at the Brookings Institution in Washington, in what he described as a “re-proposal” that slashes by more than half the Fed’s original proposal for a capital requirement increase for the nation’s biggest lenders whose collapse could trigger financial chaos.
The revisions come after months of lobbying, debate, and public comment on what’s known as the “Basel Endgame” proposal, a set of rules intended to strengthen the banking sector’s resilience against future financial crises by increasing the amount of capital they hold as a rainy day buffer. For the past year or so, the Fed and its fellow watchdogs have been pushing the new rules, which are a U.S. interpretation of global regulations agreed in Basel, Switzerland, to overhaul banks after the 2008 global financial crisis and make them more resilient.
“This process has led us to conclude that broad and material changes to the proposals are warranted,” Barr said, referring to the numerous comments received in the course of the public comment period following the Fed’s announcement of the proposal in 2023. “There are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.”
The revised rules significantly scale back the scope of the original proposal, which applied to all banks with at least $100 billion in assets.
Under the new plan, as outlined by Barr, banks with assets between $100 billion and $250 billion are largely excluded from the capital hikes, a major concession to industry concerns. The one exception is that such banks must now account for unrealized gains and losses on their securities as part of their regulatory capital, an adjustment Barr said was based on public feedback and aims to better reflect the different risk profiles of banks.
For global systemically important banks (G-SIBs), which are the largest and most complex institutions, the re-proposal would raise their common equity Tier 1 capital requirement by 9 percent, a significant reduction from the previously proposed 19 percent. The eight G-SIBs that are domiciled in the United States had nearly $1 trillion in common equity Tier 1 capital at the end of June, so the reduced capital requirement means they will have to collectively boost their buffer by around $90 billion rather than the original proposal’s $190 billion.
Daniel Pinto, President of JPMorgan Chase, one of the U.S. G-SIBs, said during the Barclays Global Financial Services Forum that the bank would closely examine the re-proposal.
“Obviously 10 is better than 20. So that’s good,” Pinto said, referring to the approximate halving of the capital requirement for G-SIBs under the re-proposal as outlined in Barr’s speech. “The issue is we have no idea what they have changed,” he added, with the banking industry now waiting for the Fed to release a detailed version of the re-proposal that Barr outlined in his speech.
Bank of America CEO Brian Moynihan said during the Barclays Global Financial Forum that he does not believe there’s a need for banks like his to hoard more rainy-day capital.
“We’re fine. We can continue to buy back stock,” he said. “If our capital goes up by 10 percent, it stops us from making $160 billion loans we would otherwise make. Those loans would go to small businesses and middle-market companies at competitive rates.”
Under the re-proposal outlined by Barr, other large U.S. banks that are not G-SIBs but still have significant assets (between $250 billion and $700 billion), will see their capital affected mostly through the inclusion of unrealized gains and losses on securities. This means that such banks will see an increase in their capital buffer of around 3 percent to 4 percent.
Meanwhile, smaller non-G-SIB firms still subject to the rule will see a modest increase of 0.5 percent in their capital requirement, according to Barr, who previously signaled his willingness to revamp the rules in the face of feedback.
Besides facing opposition from the banking industry, which argued the Fed’s original proposal would increase borrowing costs and damage the economy, the Basel Endgame plan was also criticized by both Democrats and Republicans, who said it would make it harder to borrow money for aspiring homebuyers and potential business owners alike.
*Reuters contributed to this report.* Can you please rewrite this sentence?
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