US Regulators Unveil Plans to Ease Big Bank Capital Rules (2)

Wall Street lending giants would get relaxed capital requirements under proposals unveiled by the Federal Reserve on Thursday, in a move that could potentially unleash billions of dollars for lending, share buybacks and dividends.

The package of proposals, which are subject to a 90-day public consultation before they can be finalized, were crafted by officials at the Fed, in addition to the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The Fed’s Board of Governors as well as the FDIC Board, which includes the head of the OCC, voted to formally propose the plan Thursday.

“These changes would strengthen our overall capital framework, which would remain robust under the new regime,” Fed Vice Chair for Supervision Michelle Bowman said in a statement.

The proposals represent a major win for Wall Street after banking groups fiercely campaigned against a 2023 plan to significantly hike capital requirements. Top banking agencies have since largely embraced President Donald Trump’s deregulatory drive, as the administration looks to loosen the guardrails for the industry and help traditional lenders compete with non-banks and private credit.

If finalized, the plans — along with moves to ease the enhanced supplementary leverage ratio and overhaul stress tests — would amount to some of the biggest bank-capital rule changes since those enacted following the 2008 financial crisis.

Read More: How Trump Is Loosening the Rules for Big Banks: QuickTake

When combined, the proposals, are expected to result in a “moderate decrease” in capital requirements for some banks, the Fed said in a memo. For the biggest banks, common equity tier 1 capital — the highest quality of regulatory capital — are projected to decrease by 4.8% in aggregate, while midsize banks would see an aggregate reduction of 5.2%. Smaller banks are eyeing a potential aggregate 7.8% capital cut.

Fitch Group Inc. said in a statement that it does not expect a sharp near-term drop in capital “but warns that gradual easing across stress tests, leverage rules, and risk-based standards could cumulatively erode buffers and ratings headroom over the medium-term.”

Basel III

One part of the package is tied to Basel III, an international accord that is intended to prevent future bank failures and another financial crisis.

Specifically, that portion would eliminate “duplicative” methodologies for big banks to calculate their requirements, as well as better capture credit, market and operational risks for the largest, most internationally active banks, among other things. The move aims to ensure the requirements for these banks accurately reflect their capacity to absorb losses, such as from interest rate risk.

Regulators expect that measure to result in a small capital hike for the likes of Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.

The proposal from Trump-era regulators is a stark shift from a 2023 plan, which would have forced some big banks to hold onto significantly more capital to buffer against potential losses.

The earlier Basel III proposal — which included some stiffer mortgage capital requirements — was never finalized. At the time, critics argued that a major hike could raise the costs of lending and put US banks on a weaker footing against international rivals, while supporters said that measure was crucial for financial stability.

Another part of the package unveiled on Thursday would address the risk-sensitivity for midsize banks by applying a standardized approach and require more banks to include unrealized gains and losses from some securities in their capital ratios. It also would bolster residential mortgage, consumer and corporate loans, regulators said.

G-SIB Surcharge

The Fed also unveiled a plan that would adjust the surcharge for US global systemically important banks to see it indexed for changes in the nominal gross domestic product, which officials said would put the buffer more in line with international standards. Fed Chair Jerome Powell said that would permit banks to grow without seeing their systemic capital surcharges increase.

The plan also proposes assigning surcharges in increments of 10 basis points rather than 50 basis points.

Fed Governor Michael Barr, who previously served as the agency’s top bank cop, opposed the plans and said significant reductions in capital requirements are “unnecessary and unwise.”

Industry groups, including the Bank Policy Institute, the Financial Services Forum and the Futures Industry Association, applauded the measures but some Democratic lawmakers and academics criticized what they see as an outsize benefit to industry over American households.

“The estimated declines in capital levels are just an opening bid,” said Jeremy Kress, a former Fed bank policy attorney who teaches business law at the University of Michigan. “After banks submit their comments and optimize their balance sheets under a final rule, we could be looking at a much larger capital reduction.”

(Updates with additional detail beginning in fourth paragraph.)

--With assistance from Jarrell Dillard and Katherine Doherty.

To contact the reporter on this story:
Katanga Johnson in Washington at kjohnson655@bloomberg.net

To contact the editors responsible for this story:
Megan Howard at mhoward70@bloomberg.net

Katanga Johnson

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