LDN - Business

US banks warn stricter capital rules will raise prices

[July 17, 2023] By Pete Schroeder and Nupur Anand

WASHINGTON/NEW YORK (Reuters) -U.S. bank executives warned on Friday that looming higher capital requirements would raise prices for financial products and push activity into less regulated sectors as regulators weigh new rules to cushion against any potential losses.

Federal banking regulators are expected to introduce proposals in the coming weeks requiring banks to keep more cash on hand to ensure the financial system remains stable. Federal Reserve Vice Chair for Supervision Michael Barr said this month that large firms need to hold more in reserve to guard against unknown risks.

While detailed plans have not been announced, bank executives are already sounding warnings about the potential drawbacks.

"Higher capital requirements definitely increase the cost of credit, which is bad for the economy," Jeremy Barnum, JPMorgan Chase's chief financial officer, said on a conference call on Friday after the bank reported its second quarter earnings.

The nation's largest lender may increase prices or abandon some products as a way to offset the higher capital costs, Barnum said.

One key new expected rule would require banks to hold more capital against certain trades. JPMorgan officials also told investors that the bank would likely have to drop a derivatives product tied to the U.S. Treasury yield curve as a result, since it would no longer be economical.

The rules could have more significant consequences for mortgages, which could be "harder to offer the homeowners," JPMorgan officials said.

The Fed and other banking regulators are preparing to implement new risk-weighted requirements outlined in international standards agreed by the Basel Committee on Banking Supervision after the 2008 financial crisis.

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The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger/File Photo

Meanwhile, banks are staying cautious and preserving capital until there is more clarity around the rules.

"There's a lot of uncertainty out there about the new capital requirements, both in terms of the nature of them and the timing of implementation," Citigroup's CEO Jane Fraser said in a separate post-earnings conference call on Friday.

Wells Fargo was expecting capital requirements to climb and weighing the potential effect on stock buybacks, CEO Charlie Scharf told investors on its call.

Industry lobbyists in Washington are also pushing back against more stringent rules. One particular area of concern is the potential application of capital charges on non-interest revenue, which include fees lenders charge on credit cards or investment banking services.

If regulators impose more onerous restrictions on banks, executives said activity would drift to more lightly regulated financial middlemen, with the potential for Blackstone and Apollo to benefit. Shares of both have risen sharply in recent days.

Apollo and Blackstone were not immediately available for comment.

"This is great news for hedge funds, private equity, private credit -- and they're dancing in the streets," JPMorgan Chase CEO Jamie Dimon told investors.

(Reporting by Pete Schroeder in Washington and Nupur Anand in New York; Additional reporting by Saeed Azhar and Tatiana Bautzer in New York; Editing by Lananh Nguyen, Megan Davies and Susan Heavey)

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