According to people familiar with the matter quoted by Bloomberg on August 16th Eastern Time, Federal Reserve Chairman Jerome Powell recently attended a closed-door meeting attended by CEOs of large US banks, encouraging them to cooperate with the Federal Reserve to avoid a years-long legal battle over the Biden administration's signature capital plan.

Recall that the banking regulatory new rule proposed by US regulatory agencies in July last year requires banks with assets over $100 billion to increase their capital by about 16%. But recently, it was reported that the Federal Reserve showed other regulatory agencies a modified proposal, and the increase in bank capital may be lowered from the initial 16% to a minimum of 5%.

Analysts say that the modified proposal mentioned by Powell at the closed-door meeting is an important step, which means that the final version may not be finalized this year. The final proposal for the "US Basel Accord New Regulations" and their impact depends on the results of the US election, and there are still many variables in the US regulatory reform of bank capital.

Scoop

According to people familiar with the matter quoted by Bloomberg on August 16th Eastern Time, Federal Reserve Chairman Jerome Powell recently attended a closed-door meeting attended by CEOs of large US banks, encouraging them to cooperate with the Federal Reserve to avoid a years-long legal battle over the Biden administration's signature capital plan.

Sources revealed that Powell told large bank executives such as Jamie Dimon of JPMorgan and Jane Fraser of Citigroup that the public will have the opportunity to comment on key revisions to the plan. The meeting was hosted by the Financial Services Forum, an industry organization of major US banks, and attendees included the CEOs of the four big US banks: JPMorgan, Morgan Stanley, Citigroup, and Bank of America.

According to the latest revelations, CEOs of large US banks asked Powell whether the Fed would act independently of other regulators when announcing key revisions and soliciting public opinion.

Some participants revealed that Powell gave them the impression that the Fed may act independently of other regulators when announcing modifications to the new proposal. Powell mentioned the regulations of the EU version of the Basel Accords, pointing out that the EU version will increase banks' capital by 10% overall.

Sources stated that Powell's comments on the capital regulations proposal to the banks were described as senior-level comments, focusing on how he intends to reach the final regulations. He will partially achieve the final regulations by seeking new public opinions and publishing relevant proposal research.

Powell warned large US banks that they should now submit questions to the Federal Reserve to avoid going to court in the future.

Compromise

Recall that US regulatory agencies last July announced a series of comprehensive modifications to the capital requirements for banks in response to changing international standards and recent regional banking crises. The proposal requires banks with assets over $100 billion to increase their capital by about 16%, and the eight largest banks in the United States need to increase their capital by about 19%.

The proposal is related to the Basel III reforms that began more than a decade ago and is called the "Basel III Endgame". Supporters argue that the proposal is a solution to some of the issues exposed by the collapse of Silicon Valley Bank and Signature Bank.

But recently, it was reported that the Federal Reserve has submitted a modified proposal to other US regulatory agencies, which significantly reduces the capital requirements for large trading banks, and the increase in bank capital may be lowered from the initial 16% to a minimum of 5%. This will greatly reduce the burden on Wall Street banks.

Sources said the new law would repeal key parts of this landmark law, including those that could have a significant impact on large banks with large trading businesses.

Some analysts believe that this policy relaxation will mean the victory of Wall Street banks, which launched the most intense lobbying campaign after the proposal was announced last July. Revising the plan extensively is more likely to achieve Powell's goal of gaining widespread support from the board of directors.

Before this, the US banking group launched a fierce lobbying campaign, arguing that the initial proposal of the regulatory agency would reduce the competitiveness of the US banking industry and reduce the affordability of home and business loans.

Large US banks believe that their capital is sufficient, not only standing up to the test of the COVID-19 pandemic, but also passing the Federal Reserve's annual stress tests regularly, therefore any capital increase is unreasonable. Some large banks even threaten to file lawsuits.

Changes

According to comments, Powell's recent closed-door meeting with CEOs of major US banks sought to use his personal influence to persuade Wall Street and members of the Federal Reserve Board of Governors to reach consensus and push for the plan to be finalized.

During a congressional hearing held in July this year, Powell told US lawmakers that significant progress had been made in amending the regulations promulgated under the Basel Accord, and that the regulatory body was "very close" to deciding on a final revised version of the new rule.

Powell believes that regulators should seek more opinions on the "US version of the Basel Accord's new rules". After the Federal Reserve issued the revised proposal, it sought a period of time for soliciting opinions, which is about 60 days.

He emphasized that there is still some gap before the revised proposal is put forward, and he refused to disclose the exact adjustment content of the "US Version of Basel Accord's New Rules", stating that completing the final version of the new rules by early 2025 "might be the right thing to do".

Analysts said that the modification proposal mentioned by Powell is an important step, which actually means that the final version of the "US version of the Basel Accord's new rules" may not be finalized this year and its final form and impact will depend on the results of the US election, which means there are still considerable variables in the US regulatory framework for banking capital reform.

Editor/ping