Federal Reserve Seemingly Caves to Lobbyist Pressure

The Federal Reserve’s new banking regulations are poised to redefine capital requirements, stress testing, and risk management among financial institutions.

At a Glance

Fed Vice Chair Michael Barr announces significant revisions to the bank-capital rules proposal.
Capital hike for the eight largest US banks reduced from 19% to 9%.
Smaller lenders exempted from large portions of the measure.
Changes aim to address Wall Street concerns and avoid legal battles.
Final decisions pending from Fed, FDIC, and OCC.

Federal Reserve Unveils Sweeping Changes to Bank Capital Rules

In a significant shift, the Federal Reserve has announced extensive revisions to its proposed bank capital rules, dramatically reducing the regulatory burden on the nation’s largest financial institutions. Fed Vice Chair for Supervision Michael Barr unveiled the changes, which will cut the expected impact on the biggest banks by half and exempt smaller lenders from substantial portions of the measure.

The most notable change is the reduction in capital requirements for the eight largest US banks, including industry giants Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. Initially, these institutions faced a daunting 19% increase in their capital cushions. However, under the revised proposal, this hike has been slashed to a more manageable 9%.

Addressing Industry Concerns and Legal Threats

This substantial revision appears to be a response to the strong pushback from Wall Street and the banking industry at large. The initial proposal had sparked concerns about potential negative impacts on lending and economic growth, with some banks even threatening legal action. By significantly reducing the capital requirements, the Federal Reserve seems to be extending an olive branch to the financial sector, potentially avoiding a prolonged legal battle.

The proposed revisions previewed by Fed Vice Chair for Supervision Michael Barr would roughly slice in half the 19% capital hike that regulators had planned for the eight biggest US banks.

Not everyone is happy with the concessions, including Senate Democrat Elizabeth Warren. “The revised bank capital standards are a Wall Street giveaway, increasing the risk of a future financial crisis and keeping taxpayers on the hook for bailouts,” she said. “After years of needless delay, rather than bolster the security of the financial system, the Fed caved to the lobbying of big bank executives.”

Tiered Approach to Regulation

The revised proposal introduces a more nuanced, tiered approach to bank regulation. While the largest banks will still face increased capital requirements, albeit at a reduced level, medium-sized banks are set to receive significant relief. Banks with assets between $100 billion and $250 billion will be exempt from most Basel III endgame mandates, with the exception of recognizing unrealized gains and losses on securities.

This tiered approach reflects a recognition of the varying systemic risks posed by banks of different sizes. It also addresses concerns that overly burdensome regulations on smaller institutions could stifle local and regional economic growth.

Balancing Act: Stability vs. Economic Growth

The Federal Reserve’s revised proposal represents a delicate balancing act between ensuring financial stability and promoting economic growth. While the reduced capital requirements may ease concerns about restricted lending, some critics argue that it could leave the financial system more vulnerable to future shocks.

As the Federal Reserve, FDIC, and OCC finalize their decisions on these changes, the financial industry and regulatory experts will be watching closely. The complete revisions, expected to span up to 450 pages, may be released by September 19, followed by a comment period of up to 60 days. This process will likely shape the future of banking regulation in the United States for years to come.