US regulators propose 16% increase in bank capital requirements.

U.S. Regulators Propose Sweeping Overhaul of Bank Capital Requirements

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In a move that has been described by the banking industry as “misguided,” U.S. regulators have unveiled an ambitious proposal to overhaul the capital requirements for banks. This sweeping overhaul would require banks to set aside billions more in capital to guard against risk. While regulators argue that a more resilient banking system would be the ultimate outcome, the industry fears that fee increases and service cuts could be unavoidable.

If fully implemented, the proposal would lead to a 16% increase in capital requirements for large banks, with the biggest and most complex firms feeling the brunt of the changes. The Federal Deposit Insurance Corporation has already approved the proposal, while the Federal Reserve is set to vote on it later. This marks the first step in an extensive effort to tighten bank oversight, especially in light of recent financial turmoil that saw the failure of three major financial firms.

The aim of the proposed rule is to completely overhaul how banks measure risk and, consequently, determine the reserves they must hold as a cushion against losses. The plan would scrap the prior reliance on internal models used by banks to measure various types of risk, in favor of a standardized approach. Regulators argue that this shift would produce more consistent and comparable results.

Moreover, the proposal would reverse previous relief measures for banks with over $100 billion in assets, implemented following the failure of several midsized firms. Under the new plan, large banks would be required to account for unrealized gains and losses on available-for-sale securities and adhere to a stricter leverage requirement.

Banks with assets ranging from $100 billion to $250 billion, including Citizens Financial Group, Fifth Third, Huntington, and Regions, would be most affected by these changes. These institutions had enjoyed relaxed rules under the 2019 changes but would now have to adapt to the stricter regulations.

On average, the largest U.S. banks would see a 19% increase in capital requirements, while banks with assets exceeding $250 billion would face an average increase of 10%. Banks in the $100 billion to $250 billion range would experience an average increase of 5%, in line with prior expectations.

Despite the proposed changes, major banks’ shares remain stable or even show some gains. JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley have all responded with minimal fluctuations, demonstrating confidence in their ability to adapt to the new regulations.

However, the Securities Industry and Financial Markets Association (SIFMA) has voiced concerns over the proposal, particularly regarding the proposed operational risk capital charge. SIFMA argues that this charge would penalize firms engaged in fee-based wealth management and investment banking activities. President and CEO Kenneth E. Bentsen, Jr., stated that “imposing a punitive capital charge on businesses that provide steady fee income is misguided.”

With the proposal spanning over 1000 pages and covering numerous topics, it is expected to kickstart an intense lobbying battle by the banking industry. Firms will seek to soften, delay, or derail the initiative through their lobbying efforts. Regulators have opened the proposal for public input until November 30, aiming to fully implement the requirements by July 1, 2028.

Banks have criticized the increases, deeming them illegitimate and economically harmful. They argue that regulators already require capital holdings against some of the risks measured in the proposal, making the new requirements redundant. Greg Baer, President and CEO of the Bank Policy Institute, asserted that “the dramatic capital increases proposed today reflect a bad deal cut in Basel without public transparency or Congressional input.”

Top officials at JPMorgan Chase, Bank of America, and Morgan Stanley have warned that stricter regulations could force them to either reduce their services or increase fees. Analysts predict that complying with the new requirements could take years of retained earnings, potentially limiting banks’ ability to boost dividends or buy back shares. Nonetheless, agency officials claim that most banks already have sufficient capital to meet the proposal, and those that need to catch up would require at most two years of retained earnings to do so.

The proposed overhaul of bank capital requirements in the U.S. will undoubtedly have far-reaching implications for the banking industry. As regulators aim to create a more resilient banking system, the industry will face the challenge of adapting to the new regulations while managing potential fee increases and service adjustments. The coming months will witness a fierce lobbying battle between regulators and banks as they seek common ground on this significant regulatory change.

US regulators propose 16% increase in bank capital requirements.

U.S. Regulators Propose Sweeping Overhaul of Bank Capital Requirements

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