Fed to cut biggest banks’ capital hike by half in overhaul

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 includes the impact of unrealised gains and losses on their securities in regulatory capital, Barr said. But banks with assets between $100bn and $250bn would be exempt from the so-called Basel III endgame mandates — other than a requirement to recognise those unrealised gains and losses.

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 public should not view any omission of a potential change in these re-proposals as an indication that the agencies will finalise a provision as proposed,” he said.

The revisions were negotiated among the three regulators.

“The Federal Reserve, OCC, and the FDIC have worked collaboratively on the Basel III proposal, including the changes outlined in Vice Chairman Barr’s remarks, and I look forward to the next steps in the process of bringing Basel III to a conclusion,” FDIC Chairman Martin Gruenberg said in a statement Tuesday.

Other key changes in the works include reducing so-called risk weights tied to banks’ mortgage lending and tax-equity exposures. The Fed will also recommend changes to how the capital surcharge for global systemically important banks is calculated, Barr said.

“In addition, for the future, I intend to recommend that we account for effects from inflation and economic growth in the measurement of a G-SIB’s systemic risk profile,” he said. “As a result, a G-SIB’s surcharge would not change based simply on growth in the economy.”

The complete revisions are expected to run up to 450 pages and may be released as soon as September 19, Bloomberg reported last week. After they are published, there will be a 60-day comment period where regulators seek responses from the industry and the public.

The proposal is tied to Basel III, an international accord that followed the 2008 financial crisis and is intended to prevent future bank failures and another crunch. Some supporters of the US proposal have also billed it as a fix for some of the issues exposed by the collapses of Silicon Valley Bank and Signature Bank in March 2023.

Following stiff resistance from banks, Barr and Powell had promised that regulators would make “broad and material” changes to the capital plan. In July, Powell attended a closed-door meeting with a group of big-bank CEOs, encouraging them to work with the Fed to avoid a years-long legal battle over the capital proposal.