The Federal Reserve has cut a proposed increase to capital requirements for the largest US banks by more than half after a backlash from the industry and politicians.
Michael Barr, the US central bank’s top regulator, announced a revised plan on Tuesday that would impose a 9 per cent rise in capital requirements on the biggest lenders, down from the 19 per cent proposed last summer.
The revised rules are a win for banks, which had waged a lobbying blitz against the proposal.
They were a blow for Barr, who had hoped to use the package of banking reforms to address what he viewed as remaining vulnerabilities in the US financial system.
Last summer’s proposal applied to banks with assets of $100bn or more. Now, the vast majority of the rules no longer apply to those with less than $250bn.
Jaret Seiberg, financial research analyst at TD Cowen, described the Fed’s revision of the rules as a “significant win for the biggest banks”.
The new rules came after of a string of bank failures that led to the collapse of midsized lenders such as Silicon Valley Bank, Signature Bank and First Republic in 2023.
On Tuesday, Barr said that the US central bank had initially been “conservative” in its proposal last summer, but had since been responsive to feedback to it.
He added that the Fed had worked on the latest plan with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Wall Street lobbyists put up billboards and ran television ads warning of dire consequences for “everyday Americans” if last summer’s rules, dubbed “Basel Endgame”, were put in place as originally proposed.
The Financial Services Forum, which lobbies for the eight largest US banks, said in a statement that it would review the revisions and submit a comment as part of the Fed’s review process.
The campaign argued that the increased capital rules would crimp lending, damage the economy and hit minority communities.
In a statement on Tuesday, Elizabeth Warren, the progressive senator from Massachusetts, hit back at Barr’s plan, saying it was a “Wall Street giveaway, increasing the risk of a future financial crisis and keeping taxpayers on the hook for bailouts”.
“After years of needless delay, rather than bolster the security of the financial system, the Fed caved to the lobbying of big bank executives,” she said.
An initial package of reforms called Basel III was implemented in the wake of the 2008 financial crisis and required certain banks to have a larger cushion of equity to absorb unexpected losses in the event of financial stress.
In 2017, international regulators agreed to strengthen that regime to close remaining loopholes to safeguard the banking system. However, Wall Street banks claimed that the Fed’s interpretation of these rules for the US was even stricter than the global standard.
They pointed in particular to the Fed’s requirements around so-called operational risks, which cover possible outcomes such as cyber attacks, fines and rogue trading.
The pushback from banks contributed to a years-long delay in the Fed proposing how the Basel loopholes should be closed in US capital rules.
In what Barr characterised on Tuesday as a “reproposal”, the latest rules will still introduce capital requirements relating to operational risks. These requirements have previously been based solely on the loans and investments on banks’ books.
But the proposed rules will largely exclude as an operational risk some of the big banks’ largest non-lending businesses, such as asset management, significantly lowering extra capital needed to meet the new requirement.
The Fed also removed a so-called internal loss multiplier that would adjust lenders’ capital requirements based on past operational losses.
Requirements regarding mortgages and tax equity financing exposure will no longer be as onerous as previously proposed. Banks will also be able to use their own models to assess market risks. Barr on Tuesday said that the changes could have an overall positive effect on mortgage access.
Barr said on Tuesday that the changes represented an “interim step”, adding that the Fed would seek further feedback before voting on the proposal. He said he expected to secure “broad support” from his colleagues on the Fed’s board of governors.
He argued that the “broad and material changes . . . would better balance the benefits and costs of capital . . . and result in a capital framework that appropriately reflects the risks of bank activities”.
Barr and Fed chair Jay Powell had previously signalled an openness to overhaul the rules after a comment period this year in which interested parties could provide feedback.
Powell acknowledged in March “real concerns” that the 2023 plans could add risks to the banking system and undermine market competition.
Both leading US political parties had criticised the previous proposals. Tim Scott, the top Republican on the Senate banking committee, said they would force “more money to the sidelines of the greatest economy on the planet and out of the hands of first-time homebuyers, business owners, and folks trying to achieve the American dream”.
Democrats and non-profit groups also criticised the rules for allegedly shutting riskier borrowers out of the mortgage market.