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The Federal Reserve has cut a proposed increase to capital requirements for the largest US banks by more than half after a backlash from the industry and politicians.
Michael Barr, the US central bank’s top regulator, announced a revised plan on Tuesday that would impose a 9 per cent increase in capital requirements on the biggest lenders, down from the 19 per cent proposed last summer.
The revised rules are a win for banks, which had waged a lobbying blitz against the proposal.
They mark a blow for Barr, who had hoped to use the package of banking reforms to address what he viewed as remaining vulnerabilities in the US financial system.
Last summer’s proposal came after of a string of bank failures that led to the collapse of midsized lenders such as Silicon Valley Bank, Signature Bank and First Republic in 2023.
Wall Street lobbyists put up billboards and ran television ads warning of dire consequences for “everyday Americans” if the rules, dubbed “Basel Endgame”, were put in place as originally proposed.
The campaign argued the increased capital rules would crimp lending, damage the economy and hit minority communities.
An initial package of reforms called Basel III was put forward in the wake of the 2008 financial crisis, which would have required certain banks to have a larger cushion of equity to absorb unexpected losses in the event of financial stress.
In 2017, international regulators agreed to strengthen the regime to close remaining loopholes to safeguard the banking system. However Wall Street banks claimed that the Fed’s interpretation of these rules for the US was even stricter than the global standard.
They pointed in particular to the US central bank’s requirements around so-called “operational risks”, which cover possible outcomes such as cyberattacks, fines and rogue trading.
In what Barr characterised on Tuesday as a “reproposal”, the latest rules will still introduce capital requirements relating to operational risks. Capital requirements have previously been based solely on the loans and investments on banks’ books.
But the proposed rules will largely exclude as an operational risk some of the big banks’ largest non-lending businesses, such as asset management, significantly lowering extra capital needed to meet the new requirement.
The Fed also removed a so-called “internal loss multiplier” that would adjust lenders’ capital requirements based on past operational losses.
Requirements regarding mortgages and tax equity financing exposure will no longer be as onerous as previously proposed. Banks will also be able to use their own models to assess market risks.
