In a surprising move by top Federal Reserve officials, changes have been made to the proposed set of U.S. banking regulations that significantly reduce the amount of additional capital required to be held by the largest financial institutions. Originally introduced in July 2023 as the Basel Endgame, the regulations would have led to a 19% increase in capital requirements for the world’s biggest banks. However, after consulting with various stakeholders, the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. have decided to revise the proposal and implement a more conservative 9% increase in capital.
According to Fed Vice Chair for Supervision Michael Barr, the decision to reassess the proposed regulations stems from feedback received from banks, business groups, lawmakers, and other interested parties regarding the potential consequences of the original plan. Barr noted that while there are advantages to increasing capital requirements in terms of financial stability, there are also drawbacks, such as increased costs of loans and decreased accessibility to credit for consumers. The revised regulations aim to strike a better balance between these competing objectives.
The original proposal, developed in response to the 2008 global financial crisis, was designed to enhance the safety and soundness of the banking system by tightening oversight of risky activities like lending and trading. However, critics raised concerns that the heightened capital requirements could lead to higher lending rates and drive borrowers towards non-bank lenders. Industry leaders, including JPMorgan Chase CEO Jamie Dimon, vocally opposed the initial proposal, prompting regulators to reconsider their approach.
Under the revised regulations, regional banks with assets ranging from $100 billion to $250 billion are exempt from certain provisions, with the exception of a requirement to account for unrealized gains and losses on securities in their regulatory capital. This adjustment is expected to result in a modest 3% to 4% increase in capital requirements over time. The inclusion of this provision appears to be a response to the failures of mid-sized banks last year, which were attributed to deposit runs triggered by unrealized losses on bonds and loans amid rising interest rates.
The evolving landscape of U.S. banking regulations reflects a delicate balance between financial stability and market competitiveness. The revisions to the proposed regulations demonstrate a willingness on the part of regulators to engage with industry stakeholders and consider the potential ramifications of their decisions. While the ultimate impact of the revised regulations remains to be seen, it is evident that a collaborative and consultative approach is crucial in shaping the future of the financial sector.
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