U.S. banking regulators are preparing to publish draft rules in the coming weeks that could substantially ease the amount of capital many lenders must hold to cover potential losses, in what would represent a notable regulatory win for the banking industry.
Officials at the Federal Reserve and fellow agencies are expected this month to disclose a more industry-oriented version of the so-called Basel overhaul - the framework that determines how banks evaluate and hold capital against risk, according to three industry executives.
The agencies are also planning to circulate a separate proposal that would reduce an additional capital surcharge applied to the riskiest global systemically important banks, known as GSIBs, the executives said.
Fed Vice Chair for Supervision Michelle Bowman is leading the effort and is scheduled to speak on Basel this Thursday. Other senior regulators are slated to discuss regulatory topics earlier in the week - Jonathan Gould, the Comptroller of the Currency, and Travis Hill, chair of the Federal Deposit Insurance Corporation, are due to speak at a Tuesday event on regulatory issues.
The package represents the culmination of a multi-year push by Wall Street and large U.S. lenders to soften measures introduced after the 2007-09 financial crisis, changes which industry executives and some regulators have argued are constraining economic activity.
Ian Katz, a managing director at Capital Alpha Partners, said he shares the widespread expectation that the forthcoming proposal will be favorable to banks. "There has been talk from the regulators for a long time that it would be roughly capital neutral. It’s possible that it will be a bit better than that for some banks," he said.
Industry sources and analysts expect the Basel draft to reallocate how capital is distributed across business lines, which is likely to leave overall capital levels broadly unchanged for most banks. Banks with significant Wall Street trading operations could see modest increases in required capital, Reuters reported in October; those increases may be counterbalanced by reductions in the GSIB surcharge.
At an industry conference, Fed General Counsel Mark Van Der Weide said the agencies are aiming for a proposal that does not produce major disruption across the banking sector. In addition to the Basel changes, regulators are moving to relax a related leverage ratio and the Fed plans to alter its annual bank stress testing routines by making the models used in those reviews more transparent.
Taken together, the officials and analysts who spoke with industry sources expect capital requirements to remain flat or decline slightly for most large U.S. banks.
That expected outcome would be a sharp reversal from an earlier proposal that had prompted alarm in the industry. When Bowman’s Democratic predecessor Michael Barr first unveiled a draft, it implied an aggregate capital increase of around 19% for banks, triggering an intense campaign of pushback from the sector.
Douglas Elliott, a partner at consultancy Oliver Wyman who focuses on bank regulation, said that under the U.S. approach GSIB capital requirements could fall by as much as 10% in coming years, depending on the final technical details. He said the changes have already set off a global move toward regulatory easing as other countries worry their banks might be disadvantaged otherwise. "That’s a significant shift in competitiveness toward U.S. banks and frankly they’ve already been winning," Elliott added.
Bowman has indicated an intention to publish the proposal by the end of March, and regulators have submitted the plan to the administration for review. Both the Basel overhaul and the GSIB surcharge adjustment are complex, lengthy rules that will be opened for industry comment once published. How long the rulemaking process will take and when the proposals may be finalized remains unclear.
Observers also noted a political wildcard: the upcoming midterm elections could complicate or delay the process. If Democrats, who generally oppose rolling back bank rules, gain additional seats in Congress, they could use that leverage to contest or obstruct looser capital standards, the people familiar with the regulators’ thinking said.
Requests for comment from the Fed and FDIC were declined. The Office of the Comptroller of the Currency did not respond to a request for comment.
Clear summary
Regulators within the Trump administration plan to release a draft Basel proposal this month that industry executives anticipate will be more favorable to banks, potentially lowering overall capital cushions and relaxing the GSIB surcharge. The move is part of a broader effort to adjust leverage and stress-testing practices, and the proposals will be open for public comment before finalization. Political dynamics around the midterm elections could affect the timeline and outcome.