Fed to slice in half capital hike for largest banks in overhaul

Bloomberg News

This article was written by Katanga Johnson and Hannah Levitt. It appeared first on the Bloomberg Terminal.

US regulators will make extensive changes to their bank-capital rules proposal, cutting the expected impact to the largest banks by half and exempting smaller lenders from large portions of the measure, a top Federal Reserve official said.

The proposed revisions previewed Tuesday by Fed Vice Chair for Supervision Michael Barr would roughly slice in half the 19% capital hike that regulators had planned for the eight biggest US banks. Those lenders, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., would now face a 9% increase in the capital they must hold as a cushion against financial shocks.

The overhauled proposal may ease key concerns of Wall Street banks, which unleashed one of their fiercest lobbying campaigns after the capital plan was first released in July 2023 by the Fed and two other financial regulators. The revisions could also help avoid a long legal battle with the industry, which has argued that the original proposal would hurt the economy and put US banks on weaker footing against international rivals and nonbank lenders.

“There are benefits and costs to increasing capital requirements,” Barr said in a speech at the Brookings Institution. “The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.”

Barr’s comments confirmed Bloomberg’s earlier report on the planned changes.

Other large banks subject to the rule would face an estimated 3% to 4% increase in capital requirements, which include the impact of unrealized gains and losses on their securities in regulatory capital, Barr said. But banks with assets between $100 billion and $250 billion would be exempt from the so-called Basel III endgame mandates — other than a requirement to recognize those unrealized gains and losses.

The proposed measures quickly drew criticism from prominent Senate Democrat Elizabeth Warren, who said they give banks too many concessions.

“The revised bank capital standards are a Wall Street giveaway, increasing the risk of a future financial crisis and keeping taxpayers on the hook for bailouts,” she said. “After years of needless delay, rather than bolster the security of the financial system, the Fed caved to the lobbying of big bank executives.”

The new measure isn’t a complete write-through of the original proposal. On Tuesday, Barr cautioned that the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency haven’t yet made final decisions on the changes.

The revisions were negotiated among the three regulators after the Fed had earlier floated a three-page document of possible revisions that alarmed some officials.

“The Federal Reserve, OCC and the FDIC have worked cooperatively on the Basel III proposal, including the changes outlined in Vice Chairman Barr’s remarks,” FDIC Chairman Martin Gruenberg said in a statement Tuesday. “I look forward to the agencies working together to bring Basel III to a conclusion that will strengthen bank capital and bolster financial system resilience and stability.”

Mortgage Relief

Other key changes in the works include reducing so-called risk weights tied to banks’ tax-equity exposures and mortgage lending. Capital requirements will be lower on average than they currently are for mortgages of up to a 90% loan-to-value ratio, Barr said.

A big criticism from banks had been that the original measures would have made mortgages too expensive for low-income or minority borrowers. The proposed changes were praised by the National Housing Conference, a Washington-based housing advocacy group.

“Aligning these loans with the existing capital standards will avoid discouraging lending to homebuyers who do not have the benefit of multi-generational wealth or higher-than-average incomes,” said David Dworkin, the group’s president.