US banks are selecting their battles in response to new capital rules.

US banks are selecting their battles in response to new capital rules.

Regulators Propose Capital Reform Package, Stirring Up Banking Industry


Aug 7 (ANBLE) – In a recent turn of events, regulators in Washington have put forward a comprehensive reform package that aims to address the capital regulations in the banking industry. As banking industry advisers delve into the details, they highlight some aspects they consider to be disruptive, particularly the risk management requirements that could impact real estate lending, consumer credit, and wealth management. While the regulators believe that these changes are necessary to strengthen the financial system, critics argue that they could hinder lending to consumers and slow down the economy.

Proposed Changes and Potential Implications

The proposal, spanning over a thousand pages, calls for an additional 16% in capital, aiming to fortify the financial system. However, this would mean that banks would have to allocate more capital for certain assets, potentially affecting returns on equity and profits. Industry lobby groups, including the Financial Services Forum (FSF), the Bank Policy Institute, and the Securities Industry and Financial Markets Association, argue that these requirements could hamper lending and have a negative impact on the economy.

While the regulators defend the proposal by citing the need for a strong financial system, the FSF counters that the largest banks were already sound and well-capitalized, raising questions about the necessity of the reforms.

Areas of Concern for the Banking Industry

Financial industry analysts foresee certain areas of the proposal facing pushback from the well-financed bank lobby. For instance, the shift from a standard risk charge to a range of risk levels for rental-backed real estate lending is expected to be met with resistance. The concern is that making such lending more expensive could reduce the credit available to historically under-served borrowers.

Likewise, the new rules view high-revenue business lines, such as wealth management, as higher risk. This means that even if there is no balance sheet risk, these businesses will need to allocate more capital. This could potentially impact trading in capital markets, creating further challenges for banks.

The Battle Between Reform Proponents and the Banking Industry

For proponents of the reforms, the primary objective is to ensure financial stability. They argue that the benefits of a strong financial system outweigh the potential costs to economic activity that may arise from holding more capital. However, major banks have offered sparing comments on the proposal. JPMorgan Chase CEO, Jamie Dimon, expressed disappointment in the design of the reforms, claiming they could limit access to credit for consumers and small businesses. Wells Fargo acknowledged that the proposals were likely to alter its risk gauges for lending and increase its capital requirements. Citigroup declined to comment, while Bank of America did not respond to requests for comment.

Kevin Stein, a senior adviser at Klaros Group, believes that the new risk-weight norms could push more business towards non-bank lenders that operate beyond the reach of regulators. This potential shift creates further challenges for the banking industry.

The Road Ahead for Banks

The battle between regulators and the banking industry is not a new one, with previous complaints from banks being proven unfounded, according to Dennis Kelleher, head of the financial reform advocacy group Better Markets. Kelleher highlights that Wall Street often hides its special interests behind the concerns of others, using scare tactics and false claims to protect its own agenda. He emphasizes that under-capitalized banks pose a threat to the economy, lending, and the well-being of families and main street businesses.

As the proposal enters the final stages, banks now face decisions regarding buybacks and balance sheet management. Morgan Stanley analysts estimate that compliance with the new capital rules could take up to four years for the largest banks, while Richard Ramsden, a Goldman Sachs analyst, warns that the increase in risk-weighted assets could require banks to allocate approximately $135 billion in incremental capital requirements.

In conclusion, the regulators’ proposed capital reform package has sparked a heated debate within the banking industry. While the regulators aim to fortify the financial system and mitigate the risks of financial instability, industry lobby groups and banks express concerns that these reforms could hinder lending and have adverse effects on the economy. As this battle unfolds, the future of banking regulations hangs in the balance, with potential implications for real estate lending, consumer credit, and wealth management.