Daily Management Review

US Regulators Anticipate A Major Reduction In The Basel Capital Requirement


According to eight business executives who regularly communicate with the agencies and regulatory officials, U.S. regulators plan to drastically slash the additional capital banks are required to keep as a result of a planned rule that has faced strong opposition from Wall Street.
In July, the Federal Reserve and other bank regulators released the "Basel III" proposal, which would change how banks with assets over $100 billion determine how much cash they need to set aside for possible losses.
According to the agencies, the about thirty-six impacted institutions would see an increase in aggregate capital of almost sixteen percent. According to the people, that number is anticipated to drop precipitously when regulators begin a comprehensive revision of the document.
According to the persons, no decisions have been made and the regulatory negotiations are still in their early phases. According to the agencies, they are examining bank data and hundreds of public complaints over the proposal's effects.
The proposal's most expensive component, which would require banks to recalculate possible losses from operational risks, will result in the largest capital savings, according to three sources. Banks had been pressuring regulators in that area to lower the risk weights for fee income related to lending services, such investment banking.
According to the persons, officials want to eliminate or lower greater risk weights on mortgages for low-income borrowers and on tax incentives for green energy.
Vice Chair of the Fed for Supervision According to three persons, Michael Barr has started reworking the plan in collaboration with Fed Chair Jerome Powell. Powell is requesting "significant" modifications, according to a senior official, who testified before Congress on Wednesday.
Regarding private regulatory matters, the official and additional sources who wished to remain anonymous spoke. The Fed said it would not comment.
Powell informed legislators on Wednesday that he believes the revised regulation will incorporate "broad, material" modifications.
"We are aware of the worries," he stated.
Although Barr has stated that he will take into account changes, such as to the operational risk and mortgage weights, this is the first time that the size of the anticipated capital decrease and other specifics of the agency talks are being made public.
These demonstrate that Wall Street is making progress in an unprecedented attempt to kill the programme, which has drawn opposition from politicians, including a number of well-known Democrats. Banks have lobbied Congress, launched grassroots and advertising efforts, and hinted that they would file a lawsuit. They have also asked regulators to resubmit the draft instead of discarding it.
"It's the most intense I've seen in the last 25 years, at the very least," stated Camden Fine, the former president of the Independent Community Bankers of America, who spearheaded successful efforts to exempt small banks from post-crisis regulations.
According to three, officials have not determined whether to re-propose the rule, which might cause it to be delayed and possibly carried over into a next presidential administration. Powell described the proposal of a new rule as a "very plausible option," but he did not rule it out in his testimony.
According to Barr, the regulations would protect the banking sector against unanticipated shocks, as demonstrated by the bank collapses that occurred last year. Additionally, he has made note of the lies told by lenders in the wake of the global financial crisis of 2007–2009 regarding the harm increasing capital requirements would do to the economy.
Representatives from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC), which collaborated on the rule's drafting, declined to comment.
"The opposition to the Basel III Endgame proposal is coming from every sector of our economy," said Kevin Fromer, CEO of the Financial Services Forum, which represents global banks
"We would hope the agencies are hearing these concerns and are working to find a way forward that will support our economy."
International capital rules that were decided upon by the Basel Committee on Banking Supervision in the wake of the global financial crisis are put into effect by the Basel proposal. Banks claim the plan overstates their risks and goes beyond the Basel agreement.
According to one of the sources, the Bank Policy Institute, a bank group, has enlisted renowned lawyer and former Labour Secretary Eugene Scalia to help develop a possible case. According to two other individuals, officials were taken aback by the strength of the opposition.
Regulators are also battling an uncommon disagreement on the Fed board. Governors Christopher Waller and Michelle Bowman voted against the plan, claiming it would harm borrowers. Powell and Vice Chair Philip Jefferson had doubts as well.
At a gathering in October, Scalia stated that this kind of dissent might be "extremely valuable" in litigation because it demonstrates to the court that even the experts are divided on the issue.
Powell assured reporters in November that a final rule backed by a majority of the US central bank board would be reached by the Fed.
Bankers claim Powell and other Fed officials are paying attention. Fed logs reveal that Powell, Barr, Bowman, Jefferson, and Fed officials have met or spoken with hundreds of business executives regarding Basel at least 50 times since September.
The logs indicate that Powell spoke with the CEOs of Barclays and Goldman Sachs about Basel. According to his calendars, which do not disclose the contents of such meetings, the Fed chair also visited or spoke with other prominent bankers in recent months, including the CEOs of JPMorgan and Bank of America. Requests for comments were either denied or left unanswered by the banks.
Reaching a consensus with the FDIC, led by Wall Street critic Martin Gruenberg, may provide another difficulty for Fed officials.
Two persons claimed that the early Basel drafts were weaker. According to a second source briefed by authorities, one of those drafts from early 2023 called for a capital increase of just one digit. However, after Silicon Valley Bank, several officials, namely at the FDIC, advocated for larger capital increases, three sources said. 
A regulatory official stated that while some officials want to finish the rule by this summer, the deadline may prove to be overly aggressive.