US regulators expected to significantly reduce Basel capital burden,
sources say
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[March 06, 2024] By
Pete Schroeder
WASHINGTON (Reuters) - U.S. regulators are expected to significantly
reduce the extra capital banks must hold under a proposed rule that has
drawn aggressive pushback from Wall Street, said eight industry
executives in regular contact with the agencies and regulatory
officials.
Bank regulators led by the Federal Reserve in July unveiled the "Basel
III" proposal to overhaul how banks with more than $100 billion in
assets calculate the cash they must set aside to absorb potential
losses.
The agencies said it would increase aggregate capital by around 16% for
the roughly three dozen affected lenders. That figure is expected to
fall sharply as regulators embark on a sweeping rewrite of the draft,
the people said.
The regulatory discussions are in their early stages and no decisions
have been made, the people said. The agencies have said they are
analyzing hundreds of public comments and data from banks on the impact
of the proposal.
The biggest capital savings will come from changes to how banks will
have to calculate potential losses from operational risks, which is the
costliest plank of the proposal, three people said. In that section,
banks had been pushing regulators to reduce the risk weights for fee
income associated with lending services, such as investment banking.
Officials are also expected to scrap or reduce higher risk weights on
mortgages to low-income borrowers and on renewable energy tax credits,
the people said.
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Fed Vice Chair for Supervision Michael Barr has begun rewriting the
proposal, working with Fed Chair Jerome Powell, three people said.
Powell, who is testifying on Wednesday before Congress, is seeking
"significant" changes, said one government official.
The official and other sources declined to be identified discussing
private regulatory issues. The Fed declined to comment.
While Barr has said he would consider adjustments, including to the
mortgage weights and operational risk calculations, the extent of the
expected capital reduction and other details of the agency discussions
are being reported here for the first time.
They show Wall Street is making headway in an extraordinary effort to
kill the proposal, which has stirred up criticism from lawmakers
including some prominent Democrats. Banks have mounted advertising and
grassroots campaigns, lobbied Congress, and have signaled they may sue.
They have also urged regulators to scrap the draft and re-propose it.
"I don't recall anything being quite this intense at least say, in the
last 25 years," said Camden Fine, former head of the Independent
Community Bankers of America who had led successful campaigns to carve
small banks out of post-crisis rules.
Officials have not decided whether to re-propose the rule, three said,
which would delay its completion and potentially push it into a new
presidential administration.
Barr has said the rules will bolster the banking system against
unforeseen shocks which were underscored by last year's bank failures.
He has also pointed out that lenders' claims following the 2007-09
global financial crisis that higher capital rules would hurt the economy
did not come true.
Spokespeople for the Federal Deposit Insurance Corporation (FDIC) and
the Office of the Comptroller of the Currency, which jointly drafted the
rule, declined to comment.
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The Wall Street entrance to the New York Stock Exchange (NYSE) is
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"The opposition to the Basel III Endgame proposal is coming from
every sector of our economy," said Kevin Fromer, CEO of the
Financial Services Forum, which represents global banks.
"We would hope the agencies are hearing these concerns and are
working to find a way forward that will support our economy."
DISSENT
The Basel proposal implements international capital standards agreed
by the Basel Committee on Banking Supervision following the global
financial crisis. Banks say the draft goes further than the Basel
accord and overstates their risks.
The Bank Policy Institute, a bank group, has hired top attorney and
former Labor Secretary Eugene Scalia to build a potential lawsuit,
one of the people said. The intensity of the opposition caught
officials by surprise, two other sources said.
Regulators are also grappling with rare dissent among the Fed's
board. Governors Michelle Bowman and Christopher Waller voted
against the proposal, saying it would hurt borrowers. Vice Chair
Philip Jefferson and even Powell also voiced skepticism.
Such dissent can also be "extremely valuable" when litigating by
showing the court that even the experts are divided on the subject,
Scalia said at an October event.
Powell told reporters in November that the Fed would reach a final
rule with broad support on the U.S. central bank board.
Bankers say Fed officials, including Powell, are listening. Since
September, Fed staff, Powell, Barr, Bowman and Jefferson combined
held at least 50 meetings or calls with hundreds of industry
executives about Basel, Fed logs show.
Powell discussed Basel with the CEOs of Goldman Sachs and Barclays,
the logs show. The Fed chair also met or spoke with other top
bankers in recent months, including the CEOs of JPMorgan and Bank of
America, according to his calendars which do not say what was
discussed. The banks declined or did not respond to requests for
comment.
Another challenge for Fed officials will be reaching an agreement
with the FDIC, which is chaired by Wall Street critic Martin
Gruenberg.
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Early Basel drafts were weaker, said two people. Another person
briefed by regulators said that one of those drafts, from early
2023, envisaged a single-digit capital increase. But some officials,
particularly at the FDIC, pushed for bigger capital hikes,
especially after Silicon Valley Bank collapsed, all three said.
Some officials hope to complete the rule by this summer, but that
timeline could prove to be too ambitious, one regulatory official
said.
Gruenberg did not respond to requests for comment.
(Reporting by Pete Schroeder; Additional reporting by Megan Davies,
Nupur Anand, Tatiana Bautzer, Saeed Azhar, Lananh Nguyen; Editing by
Michelle Price and Richard Chang)
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