The U.S. Federal Reserve and other regulators are preparing to unveil sweeping changes to proposed capital rules for banks, seeking to overcome strong opposition from the banking sector, according to people familiar with the matter.
The 450-page changes are expected to be unveiled on Sept. 19 and will reshape key components of the U.S. bank capital regime known as Basel III and Endgame, according to the people, who asked not to be identified because the plans could change.
The proposed changes are expected to help ease concerns among Wall Street banks, which launched an unprecedented lobbying campaign after the plan was unveiled in mid-2023. That could help avert a potential legal showdown with the industry, which has argued forcefully that raising capital requirements would hurt the economy and primarily hurt low-income borrowers.
After the updated proposals are published, there will be a comment period during which regulators will seek feedback by comparing the revised version to the original draft submitted by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
Spokespeople for the three regulators declined to comment.
Resistance from banks
The original changes met stiff resistance from banks, some even threatening legal action, prompting Federal Reserve Chairman Jerome Powell to step in and publicly pledge to amend the proposals. In recent weeks, he has met with the chief executives of major banks, including JPMorgan Chase’s Jamie Dimon and Citigroup’s Jane Fraser, to win their support.
Operational risk provisions
The changes are set to focus on operational risk provisions, according to the people, who asked not to be identified discussing private matters. They include reducing the amount of capital that banks must set aside for fee-based, noninterest-based activities such as wealth management services and some credit-card operations.
The amendments will also include the removal of the so-called internal loss multiplier, which would have adjusted each bank's capital requirements based on a certain number of historical operating losses.
While the proposed amendment is not a complete rewrite of the previous plan, it would also reduce market risk requirements for the country’s largest banks, known as globally systemically important banks, which had originally proposed restricted use of their internal models, according to the people.
On the credit risk front, the new requirements won’t be as stringent for mortgages or stock-related tax transactions, among other changes, the people said.
Regional Banks
The amendments also include easing capital requirements for large regional banks, or so-called Category 4 companies, as these institutions will face less stringent capital requirements in relation to market risks.
However, these large regional companies will still be required to recognize unrealized gains and losses on their available-for-sale securities portfolios, known as accumulated other comprehensive income, as part of their capital requirements, the people said.
In addition, the requirement that regional banks comply with countercyclical capital buffers, a tool the Fed uses to require banks to increase capital buffers during periods of excessive growth, will be eliminated.
Capital increase
The new plan will also include collecting data from banks to assess how the changes will affect different aspects of their businesses, according to some of the people. The quantitative impact study, which compiled end-2023 data from the nation’s eight largest banks, is supposed to help the Fed assess the relative costs and benefits of each element of the proposed rules and the regulation overall.
The original plan called for a 16% increase in the amount of capital that banks would have to hold as a buffer against financial shocks. However, the Fed later presented a watered-down version of the plan to other regulators, which alarmed some officials and led to intense negotiations. That watered-down version, which formed the initial draft of the amendments made in September, proposed a no-more-than-5% increase.
Supporters of the first version of the plan see it as a fix for some of the loopholes that contributed to the collapse of Silicon Valley Bank and Signature Bank last year. Critics, however, argue that higher capital requirements would raise lending costs and put U.S. banks at a disadvantage compared to their international competitors.
Reaching agreement between the three agencies was a difficult task, but everyone was motivated to get the work done so they could focus on other proposals that have been in the works since the regional banking turmoil last year.
