In what could be a good tiding for big banks, a report on Sunday indicated that regulators are considering significantly reducing the proposed increase in capital requirements.
What Happened: The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are working on a plan to bring down the nearly 20% increase in mandated capital increase for the biggest U.S. banks, the Wall Street Journal reported, citing people familiar with the matter.
They “are still negotiating substantive and technical revisions, and there is no guarantee that a deal will come together. It also could be late this year before any plan is ready,” the report said.
The rumored development comes after big bank CEOs, led by JPMorgan Chase & Co.’s (NYSE:JPM) Jamie Dimon, lobbied with Fed governors, including Chair Jerome Powell, to alter the capital rules proposed by Michael Barr, the central bank's vice chair for banking supervision.
The bankers tried to exploit the internal disagreement and concern within the seven-member Fed board over the regulatory proposals.
Dimon, in particular, was scathing in his attack of the proposal, the report said. Calling Barr’s proposal “flawed and poorly calibrated,” he reportedly urged other governors to speak out.
“What person, in what ivory tower thinks that that is a rational thing to do? I'd like to know what the other governors think,” he reportedly said at a conference in September. Big bank chiefs met with Powell more than a dozen times between July 2023 and March, while Barr met with them 15 times, the report said, citing the Fed’s public calendar.
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Biggest Regulatory Fight: The proposed rules are among the final efforts taken by global regulators in an attempt to avert a repeat of the 2008-2009 financial crisis, the Journal said. The intent is two-fold — to boost the resilience of the banking system and to guard against a taxpayer-backed bailout. Additionally, the Fed is eyeing mitigation of other risks, including the potential to lose money from cyberattacks.
The release of the proposals in July saw one of the biggest regulatory fight in at least a decade, the report said. Big banks lobbied hard and were reportedly supported by a slew of lawmakers and others, including affordable-housing advocates. Their efforts included airing pricey television ads during National Football League games warning of dire economic consequences.
Goldman Sachs specifically spent millions on its own advocacy campaign. The Financial Services Forum, which represents the eight largest U.S. banks, also asked its members to chip in $2 million apiece on another ad campaign.
One area of dissent amid the negotiations is how banks accounted for the value of their trading positions and other capital-markets activities. While Powell and other Fed officials are for reducing the capital reserves tied to such activities, the other two agencies were reluctant to do so.
If the FDIC and OCC have their way, Fed officials will want to compensate with cuts elsewhere, the report said.
Capital requirements are regulatory standards for banks that determine how much liquid capital they must keep on hand, relative to their overall holdings.
The norms for banks with $100 billion or more in total consolidated assets is:
- Minimum common equity tier 1 capital ratio requirement of 4.5%
- Stress capital buffer requirement determined from the supervisory stress test results of least 2.5%
- If applicable, a capital surcharge of 1% for global systemically important banks
Higher capital norms limit the ability of the bank to lend or invest and increase the cost of funds for banks. On the other hand, in the eventuality of a distressing situation, these reserves come in handy to keep them afloat.
The Themes Global Systemically Important Banks ETF (NASDAQ:GSIB) ended Friday’s session up 0.65% at $30.33, according to Benzinga Pro data.
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