After the collapse of the US banking industry in 2023, calls for large Wall Street banks to increase capital buffers have risen. However, faced with intense lobbying by industry groups, Federal Reserve Chairman Powell previously predicted that capital buffering plans would undergo significant changes, even possibly being abolished. On Tuesday (June 25), insiders revealed that the Federal Reserve will introduce a "weakened version" plan to relieve the burden on the banking industry.

Bloomberg reported that the Federal Reserve has submitted a three-page document to other US regulators describing the modifications it may make to bank capital reform, which will greatly relieve the burden on Wall Street banks. Insiders said the modified new law would revoke key parts of the landmark law, including those that could have a significant impact on large banks with large-scale trading businesses.

(Source: Bloomberg)

The latest estimate of how much additional capital major banks will need to hold to buffer against financial shocks was not included in the Federal Reserve document. However, preliminary calculations suggest that the proposed changes may lead to a 5% increase in capital buffering rather than the overall 16% increase required by the original version.

The report emphasized that this withdrawal was a victory for Wall Street banks, which launched one of the most intense lobbying campaigns after the proposal was released in July 2023. Significantly altering the plan is more likely to achieve Powell's goal of broad support from the Federal Reserve Board of Directors.

Two Republican-appointed Federal Reserve Board members said the preliminary version could increase lending costs and affect the economy, putting US banks at a disadvantage in competing against international rivals.

Powell hinted earlier this year that the proposal would undergo "broad and substantive changes." Later, Federal Reserve Vice Chairman for Regulation Michael Barr, who is widely seen as the original plan's designer, expressed the same view.

US officials have not reached an agreement and it is unclear whether they will reach a revised plan before the November US presidential election. According to insiders, Barr has met with the heads of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to discuss reducing the increase in capital requirements.

Some insiders said key officials at the OCC and FDIC were willing to withdraw a major part of the proposal - market risk - but privately said they would resist if they believe the increase is too low.

"The Federal Reserve has not made any decision on timing, process, or substance," the Federal Reserve said in a statement. "The Federal Reserve has not established a specific range, but is focused on the substance of potential changes."

This capital reform is related to Basel III, an international agreement formulated after the 2008 financial crisis to prevent future bank failures and crises. Supporters of the US proposal also claimed it is a solution to some of the problems exposed by the collapse of Silicon Valley Bank and Signature Bank in March 2023.

Insiders revealed that regulators are considering changing the way the proposal assesses market risk for trading, wealth management, and investment banking activities, collectively known as market risk. Although Powell voted in favor of the plan in July last year, he expressed concern about the "significant increases" in indicators used to determine capital requirements related to market risk.

This part of the plan could have a significant impact on banks with a large amount of trading business. Industry officials stated in a comment letter to regulators that the proposed rules would lead to a "significant increase" in market risk capital and would hinder diversified trading business models and certain hedging practices that allow banks to manage risk.

Insiders revealed that regulators are considering how banks will use internal models to calculate trading-related risks when reviewing market risk. They said Federal Reserve documents also recommended modifying the way operational risks are handled, which will affect a wide range of banks.

The EU has been uneasy about the strong opposition to the US proposal and plans to delay the implementation of key parts of its capital rules for a year to avoid putting its banks at a disadvantage. The EU had originally planned to implement this extensive package of plans on January 1, 2025, but confirmed earlier this month that it will delay implementation of the rules affecting banking trading activities for 12 months.

One of the criticisms of the original US plan is that it could put the country's banks at a disadvantage in competing against non-bank lending institutions and overseas banks. The EU's proposal will result in an approximately 10% increase in primary capital requirements after full implementation. The US's 16% capital buffering growth is based on common stock Tier 1 capital (CET1), which is the highest quality regulatory capital covering liquid assets such as cash and stocks and accounts for most of Tier 1 capital.

According to the plan proposed in July last year, the CET1 capital of 8 Wall Street banks such as JPMorgan, Morgan Stanley, Bank of America, Goldman Sachs, and Citigroup may increase by a total of 19%. In general, the proposal applies to banks with assets of $100 billion or more. US officials say that most US banks have enough capital to meet the higher requirements. If approved, these requirements may be phased in from 2025. However, for the largest banks, Bloomberg Intelligence estimates that the proposed rules may eliminate surplus capital of up to $155 billion, which is beyond current regulatory requirements and may result in collective shortfalls. Supporters of stricter regulations say that any shortfalls can be addressed if banks retain more profits rather than using them for share buybacks and paying higher dividends. #Banking Crisis#. Banks have mentioned that they already have enough capital to withstand crises, and proposed reforms will ultimately harm consumers and small businesses. They are pushing for significant modifications to the reform and even the abolition of the entire plan. In March, Powell did not rule out the possibility of a complete overhaul. The Fed and other regulators have been pushing for the proposal, with some officials hoping to complete it as early as August.

The proposal applies generally to banks with assets of $100 billion or more.

US officials say that most US banks have enough capital to meet the higher requirements. If approved, these requirements may be phased in from 2025.

Supporters of stricter regulations say that any shortfalls can be addressed if banks retain more profits rather than using them for share buybacks and paying higher dividends.

Banks have mentioned that they already have enough capital to withstand crises, and proposed reforms will ultimately harm consumers and small businesses. They are pushing for significant modifications to the reform and even the abolition of the entire plan. In March, Powell did not rule out the possibility of a complete overhaul.

The Fed and other regulators have been pushing for the proposal, with some officials hoping to complete it as early as August.

Although officials plan to make significant changes, US administrative law requires them not to deviate too far from the proposal. Deciding to continue with the original version of the plan could reduce the impact of Republicans' consolidation of power in November, many of whom support the industry's arguments.

Abandoning the plan and starting over is more likely to postpone the final determination until after the US election. According to some insiders, the Fed's document does not mention any overhaul.