Wall Street banks set for 5% capital decline under new rules
A ‘Wall St’ sign is seen above two ‘One Way’ signs in New York.
Lucas Jackson | Reuters
Wall Street bank capital would fall 4.8% under softened capital rules unveiled by U.S. bank regulators on Thursday, freeing up billions in dollars for lending, dividends and share buybacks in a stunning victory for the industry which had faced double-digit hikes under the original 2023 plan.
Capital levels at larger regional banks would fall by 5.2%, while banks below $100 billion in assets would enjoy a 7.8% decline in their capital requirements under the proposals.
The “proposals under consideration would further enhance and streamline the capital framework while ensuring that U.S. banking organizations continue to be safe, sound, and able to support the U.S. economy across all economic conditions,” Fed staff wrote in a briefing memo for the board.
The Fed, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency are set to approve the Basel draft Thursday morning and begin soliciting feedback, kicking off another potentially frenetic round of industry lobbying as banks gain clarity over how they will fare versus their peers. The overhaul follows a years-long Wall Street bank campaign to ease rules introduced after the 2008 financial crisis which they say are stifling the economy. Critics say they will weaken financial system safeguards just as geopolitical and private credit risks are surging.
Fed Vice Chair for Supervision Michelle Bowman, who led the effort, said in a prepared statement that bank capital would still remain “robust” under the changes which would better calibrate requirements in line with risks. Regulators have tried for years to implement the “Basel Endgame,” the final piece of international capital standards introduced following the crisis, which focuses on how banks assess and allocate funds to credit, market and operational risks.
Bowman’s Democratic predecessor Michael Barr tried to advance a plan that would have hiked capital for some banks by as much as 20%, but lenders launched an unprecedented campaign to weaken the rule, winning over many lawmakers and sowing division among the regulators. That dragged the project into the Trump administration, which has sided with the industry.
Barr plans to dissent on the rule proposals at the Fed meeting later today, saying in a statement the changes are “unnecessary and unwise.” The Fed also plans on Thursday to propose tweaks to the “GSIB surcharge” levied on those global U.S. banks by updating some economic inputs and adjusting how short-term funding risk is calculated.
Analysts at Morgan Stanley this month estimated that large banks currently hold around $175 billion in excess capital, and clarity on the rules could allow them to start freeing up that money for lending and share buybacks.
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