The Federal Reserve has unveiled plans to drastically scale back a proposal to raise capital requirements for banks after politicians and the banking industry opposed the original plan, warning it would restrict lending and harm the economy.
The new proposal would increase capital levels for large banks such as JPMorgan Chase (JPM) and Bank of America (BAC) by a total of 9%, a cut in half from the original plan from more than a year ago, which called for capital increases for those institutions at about 19%.
Banks with assets between $100 billion and $250 billion, which were initially subject to the tougher standards of the largest banks, would also no longer be subject to the increases — aside from the requirement to recognize unrealized gains and losses on their securities portfolios in regulatory capital. It’s a major turnaround after last year’s spate of regional bank failures sparked by Silicon Valley Bank.
“Capital also has costs,” Fed Vice Chair for Supervision Michael Barr said Tuesday at an event in Washington hosted by the Brookings Institution. “Compared with debt, capital is a more expensive source of funding for the bank. So higher capital requirements can raise a bank’s cost of funding, and the bank can pass on higher costs to households, businesses and clients engaged in a range of financial activities.”
Read more: How do banks make money?
The new version of that plan, known as the Basel III endgame, is the result of months of tension. Fed Chairman Jerome Powell said back in March that the central bank wanted “major material changes” to the original proposal and wanted to build consensus with the Federal Reserve Board.
When it was first announced more than a year ago, it immediately sparked disagreement and division among Fed officials, who questioned whether the plan, in its initial form, would actually do more harm than good.
Fed Governor Michelle Bowman argued that the plan needed “substantive changes” and that raising 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, improve the format of the proposal and better reflect the risks. In his speech, he stressed that the new plans are far from final and that the Fed, along with the Office of the Comptroller for the Currency and the FDIC, “have not made final decisions on any aspect of the reproposals, including those not explicitly addressed in the reproposal.”
“This is an interim step,” he said.
The comment period, originally scheduled for Nov. 30 last year after the proposal was introduced in July 2023, was extended to January 2024 after banks sent letters to the Fed listing the many problems they had with the rules and lobbying aggressively.
One of the biggest concerns was that the Fed’s proposed capital requirements would raise the cost of a range of banking activities, from home mortgages and small business lending to trading. Such dynamics could potentially increase the cost of economic activity.
JPMorgan CEO Jamie Dimon even suggested that the capital plan could increase inflation through higher capital requirements for hedging, which would trickle down to consumers in the form of higher prices for everything from a can of soda to meat products.
Read more: What is inflation and how does it affect you?
The proposed changes announced Thursday are part of an effort by banking regulators to implement the U.S. version of an international accord known as Basel III, developed by the Basel Committee on Banking Supervision.
The aim of the Basel Committee, convened by the Bank for International Settlements in Basel, Switzerland, was to set global capital requirements so that banks would have sufficient reserves to cover unforeseen losses and survive crises.
Banking regulators in the US, UK and Europe began rolling out the latest version of the accord after the 2007-2009 global financial crisis. It was approved in 2017, but in the US the proposal was delayed by the COVID-19 pandemic.
Europe and the UK have both moved forward with single-digit capital buffer increases and are now in implementation phases.
Bar also said the Fed is looking at the stress tests of big banks, 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 are not yet final, they will play an important role in the banks’ overall 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 we get in the way of that. [stock] “Share buybacks,” Citigroup CFO Mark Mason said Monday at a conference in New York.
If the full proposal is released in September, “we expect banks to comment on the extent to which their excess capital will increase relative to the current rule during their October earnings reports,” Morgan Stanley analyst Betsy Graseck said in a note on Tuesday.
David Hollerith is a senior reporter for Yahoo Finance, writing about banking, crypto, and other financial topics.
Jennifer Schonberger is a seasoned financial journalist covering markets, economics, and investing. At Yahoo Finance, she covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. Follow her at X @Jenniferisms.
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