Federal Reserve officials on Tuesday announced a set of proposed changes to U.S. banking regulations that would cut by almost half the amount of additional capital that large financial institutions are forced to hold.
Regulatory reforms known as the “Basel endgame”, introduced in July 2023, were supposed to increase capital requirements for the world’s largest banks by around 19%.
Instead, officials from the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. agreed to resubmit a larger proposal with a more modest proposal to increase capital for large banks by 9%, Fed Vice Chairman for Supervision Michael Barr said in prepared remarks.
Barr told an audience at the Brookings Institution that the changes were made after banks, business groups, lawmakers and others reviewed the potential impact of the original proposal.
“Following this process, we have concluded that broad and significant changes to our proposal are warranted,” Barr said in a statement. “Increasing capital requirements has benefits and costs, and the changes we are making will better balance these two important objectives.”
The original proposal, long under consideration as a response to the 2008 global financial crisis, was aimed at making riskier activities, including lending and trading, safer and increasing oversight. But industry groups said increasing the amount of capital banks must hold to buffer against losses could have made lending more expensive or harder to obtain, potentially opening the door to more activity among nonbank financial institutions.
An earlier version drew strong protests from industry executives. JPMorgan Chase CEO Jamie Dimon has led the effort to push back against industry demands, and now those efforts appear to be paying off.
But it’s not just the big banks that would benefit: Regional banks with assets between $100 billion and $250 billion are exempt from the latest proposal, except for the requirement that they count unrealized gains and losses on securities in regulatory capital.
Barr said that portion would likely raise capital requirements by 3 percentage points to 4 percentage points over the long term, an apparent response to the collapse of mid-sized banks last year due to deposit runs tied to unrealized losses on bonds and loans as interest rates soared.
Home loans, personal loans
Barr said key parts of the proposals applying to big banks would bring some measures of risk closer to international standards, but earlier drafts were tougher on things like mortgages and personal lending.
It also reduces the risk weighting of tax-credit equity financing structures often used to finance green energy projects, eases proposed surcharges on companies with a history of operational failures and recognizes the relatively low-risk nature of investment management businesses.
Barr said he would push for the resubmission of the Basel endgame proposal and separate capital surcharge rules for the world’s largest financial institutions, which would kick off a new public review process that has already taken more than a year.
That means it won’t be finalized until after the November election, raising the risk that if Republican candidate Donald Trump wins, the rules could be weakened further or not implemented at all — a situation some regulators and lawmakers had hoped to avoid.
It is unclear whether the changes will satisfy the industry and its constituents: banks and their trade groups have threatened to sue to block the implementation of the original draft.
“We have a long way to go to improve capital requirements since the global financial crisis, and the final steps of Basel III are a key element of this effort,” said Barr. “The far-reaching and significant changes I have outlined in both proposals today will, in light of the comments we have received, better balance the benefits and costs of capital and result in a capital framework that appropriately reflects the risks of banking activities.”
