On Monday, January 6, the Federal Reserve's official website announced that the Vice Chair for Supervision, Michael S. Barr, will resign from his position. This decision will take effect on February 28, and will take effect earlier if a successor is confirmed; before then, Barr will continue to serve as a Federal Reserve Governor.

Market analysis indicates that Barr's resignation from the Federal Reserve's Vice Chair for Supervision position may be related to Donald Trump's impending formal assumption of the presidency.

Barr was nominated by President Biden in 2022 to serve as the Vice Chair for Supervision at the Federal Reserve and was a key figure in negotiating the draft Basel rule.

The draft aims to comprehensively reform how banks with assets over $100 billion calculate the capital they must set aside to absorb potential losses. Large banks and their influential lobbyists launched an expensive public campaign against this framework, arguing that requiring lenders to provide higher capital buffers would ultimately burden everyday borrowers.

As news of Barr's resignation surfaced, the ETF tracking the US Bank Index $Spdr S&P Bank Etf (KBE.US)$ rose by 2%, tracking the US Regional Bank Index ETF. $Spdr Series Trust S&P Regional Bkg Etf (KRE.US)$ Similarly, it rose over 2%.

The American banking industry seems to have gained concessions from regulators, while Donald Trump has just a few weeks left until his inauguration. So, which bank stocks are expected to benefit?

Avoid conflict with Trump.

In the Federal Reserve's official statement, Barr hinted at the reasons for his early resignation - to avoid conflict with Trump's economic team:

"The position of Vice Chair for Supervision was created after the Global Financial Crisis to create greater accountability, transparency, and responsibility for the Federal Reserve's oversight and regulation of the financial system. The risk of a controversial position could distract from the attention of our mission. In the current environment, I have determined that, as a director, I will serve the American people more effectively."

Barr may have avoided a prolonged legal battle, as there are indications that President-elect Trump is considering firing him.

Previously, the Trump administration had criticized the Federal Reserve's aggressive stance on banking regulation, while Barr had been a major supporter of strengthened regulations. The differing positions of both sides have led to speculation about Trump's potential effort to dismiss Barr after taking office.

With Barr's departure, bank stocks rally.

The departure of Barr could affect the future of a landmark proposal from US regulators, further casting a shadow over the prospects for new Basel III banking regulatory rules in the USA. Barr has been a key figure in the negotiations related to this scheme.

The banking regulatory proposal released by US regulators, including the Federal Reserve, in July 2023 requires banks with assets exceeding 100 billion dollars to increase their capital by approximately 16%, with JPMorgan, Citigroup, and seven other major banks potentially facing about a 19% capital increase.

The above scheme aims to require large banks to hold more capital to provide a buffer against future losses and financial crises, preventing bank failures and financial turmoil, but it has sparked collective protests from several Wall Street institutions.

The stricter capital requirements could lead banks to increase loan interest rates to compensate for the rising capital costs. This will raise financing costs for businesses and individuals, suppressing investment and consumption, and adversely affecting economic growth. With increasing capital requirements, banks may become more cautious in selecting loan recipients, making it difficult for some small and medium-sized enterprises and individuals to obtain loans.

Furthermore, due to the increased capital requirements, banks will have less money available for dividends and share buybacks, decreasing the attractiveness of bank stocks and potentially leading to a decline in returns for shareholders.

JPMorgan warned that these rules could make bank stocks uninvestable and force borrowers to pay higher loan costs. Goldman Sachs stated that this move has gone too far, and Bank of America also indicated that the industry and corporate sectors would advocate, ultimately resulting in a cost to the Federal Reserve.

JPMorgan CEO Jamie Dimon stated that the Federal Reserve's newly proposed reforms will limit bank lending and push more banking activities into less regulated areas. Under the Federal Reserve's proposal, lending institutions will be required to hold an additional 2 dollars of capital for every 100 dollars of risk-weighted assets.

Goldman Sachs CEO David Solomon also remarked that these new capital rules have gone too far. He continued to explain, 'They (the Federal Reserve) will harm economic growth without substantially improving safety and soundness.'

The Chief Financial Officer of Bank of America, Alastair Borthwick, also raised criticisms, stating that the Federal Reserve's proposal could mean that risk-weighted assets might be counted repeatedly in certain situations, which could again restrict lending by banks.

Borthwick mentioned at the Barclays banking conference, "I believe that the industrial and business sectors in the USA will make some significant claims, and they will ultimately pay the price for this."

According to previous media reports, after the 2023 proposal was released, the banking sector launched one of the most intense lobbying activities in history, opposing such high requirements imposed on the banking industry.

In September 2024, reports stated that regulators agreed to a comprehensive revision of the proposed package of rules, with the new scheme requiring large banks to only increase their capital by 9%. However, subsequent reports indicated that this relaxation of requirements faced opposition from several directors at the Federal Deposit Insurance Corporation (FDIC), with at least three out of five directors opposing it.

Now, as Trump's inauguration approaches, Barr, a key figure in the negotiations related to the agreement, has proposed to resign, while the Bank of America seems to have won concessions from the Institutions.

After Barr resigned, the ETF tracking the Bank of America Index $Spdr S&P Bank Etf (KBE.US)$ rose 2% at one point;

ETF that tracks the Index of American Regional Banks $Spdr Series Trust S&P Regional Bkg Etf (KRE.US)$ It once rose more than 2%.

Here, Futu News has screened the top 6 banks in the American Financial industry by Market Cap, where the revenue proportion from the USA/Americas region exceeds 40% for mooers' reference, which are: $JPMorgan (JPM.US)$ 、 $Bank of America (BAC.US)$ 、 $Wells Fargo & Co (WFC.US)$ 、 $Morgan Stanley (MS.US)$ 、 $Goldman Sachs (GS.US)$ 、 $Citigroup (C.US)$ 。

The regional banks are selected from the top ten components of the S&P Regional Banks Select Industry Index, which are: $Truist Financial (TFC.US)$ 、 $Citizens Financial (CFG.US)$ 、 $Huntington Bancshares (HBAN.US)$ 、 $M&T Bank (MTB.US)$ 、 $Regions Financial (RF.US)$ 、 $First Horizon National (FHN.US)$ 、 $Western Alliance Bancorp (WAL.US)$ 、 $Zions Bancorp (ZION.US)$ 、 $East West Bancorp (EWBC.US)$ 、 $Synovus Financial (SNV.US)$ 。

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Editor/Rocky