Summary: Large U.S. banks are making a last concentrated effort to persuade the Federal Reserve to amend elements of its revised capital rule proposal as the central bank nears the close of a lengthy consultation. Industry priorities include cutting capital charges for trading activities, eliminating capital held against unused credit card commitments, and revising a GSIB surcharge adjustment tied to economic growth. The formal comment deadline falls on Thursday, and banks say they have narrowed their requests to a smaller set of technical fixes after analysing the proposal in depth.
As the Federal Reserve approaches the conclusion of its marathon review of U.S. bank capital rules, major Wall Street institutions on Thursday will lodge formal proposals seeking changes to the central bank's recent draft. Executives and staff from several large banks, speaking anonymously because the contents of comment letters remain private, described a focused set of priorities the industry hopes the Fed will address.
Regulators, led by the Federal Reserve, released more relaxed drafts of a broad suite of capital reforms in March. The Fed estimated the changes would lower large banks' loss-absorbing capital by roughly 4.8 percent, arguing the prevailing rules were constraining economic activity. The package is part of a so-called Basel rule overhaul that revises how banks measure risk and, consequently, how much capital they must hold.
Banks told the Fed that the March proposal represented a substantial improvement compared with the central bank's original 2023 blueprint, which had been crafted by Democratic officials who favored tighter bank regulation and that had envisaged about a 20 percent rise in required capital following regional bank failures. Still, after poring over hundreds of pages of technical adjustments, lenders have flagged a range of issues they want addressed and are making a final push to secure changes, the sources said.
Industry participants plan to press three main areas in their comment submissions. First, they will argue the Fed has been overly conservative and blunt in assigning capital to trading activities. Bank officials contend that the annual stress tests the Fed conducts to evaluate individual institutions' resilience already capture trading risks, and industry groups will propose modifications that could substantially reduce or even remove the additional capital the Fed has suggested for those businesses, according to the people briefed on the plans.
Second, banks will challenge a proposal to require capital against 10 percent of unused credit lines referred to as "unconditionally cancelable commitments," the most common example being unused credit card lines. Under current practice, such credit lines do not carry capital charges because banks can cancel them at will. Regulators have argued, however, that in practice lenders may be reluctant to withdraw those lines during economic stress because of customer relationships and other considerations, and thus the revised draft would impose capital against a portion of those unused commitments.
Third, a subset of the largest banks plans to seek further adjustment of the so-called GSIB surcharge. The Fed imposed an additional capital requirement on global systemically important banks in the United States after the 2008 crisis. In its draft, the Fed proposed a one-time recalculation to reflect economic growth dating back to about 2019, and it proposed automatic updates for future growth. That approach would reduce banks' measured size relative to the economy and lower the resultant surcharge. Lenders will again argue the recalculation should reflect growth dating to the surcharge's creation in 2015, the people said.
Executives emphasized that the industry will not mount the broad-based, aggressive campaign it staged in 2023. Several people said banks have significantly narrowed the scope of their requests and will concentrate on what they consider the most material elements. One industry group initially identified nearly 100 issues with the Fed's draft but plans to press only a few dozen in its formal submission, according to a person familiar with the group's plan.
There is also a sense of urgency to bring the rulemaking to a close. "There's a really big push to get it wrapped up in the next six months because there are other items on the regulatory agenda," said Matthew Bisanz, a partner at Mayer Brown who specializes in financial regulation.
Opponents of the Fed's softer approach warn that easing capital requirements could increase banks' vulnerability to shocks and, if institutions subsequently falter, could harm the wider economy through reduced lending. Last month, Phillip Basil, director of Economic Growth and Financial Stability at Better Markets, emphasised that "strong capital standards are the foundation" of a resilient banking system because "they ensure that banks - not taxpayers, workers, or small businesses - absorb losses when risks materialize," according to a press statement.
The deadline for formal comment letters to the Fed is Thursday. A Fed spokesperson did not respond to a request for comment. Industry participants indicated they had been encouraged by messages from Fed leadership to be measured in their responses; Reuters had previously reported that Fed Vice Chair for Supervision Michelle Bowman, who is overseeing the rulewriting effort, had conveyed that guidance to banks.
With the formal consultation period ending, regulators and industry alike appear focused on resolving remaining technical disputes and moving past a policy fight that has consumed years of effort. Banks have pared back the breadth of their asks, concentrating their attention on a handful of high-priority technical changes they believe will materially affect capital requirements for trading operations, credit card commitments, and GSIB status.
Impact summary: The outcome of these discussions will affect large bank balance-sheet structures, capital planning, and potentially lending capacity tied to regulatory capital levels. Markets and sectors tied to bank credit availability - including corporate lending, consumer credit, and capital markets activity - will be among those watching the Fed's next steps.