Wall Street banks are poised to secure a victory as U.S. President Trump's appointed regulators are set to unveil a draft of the relaxed new capital rules this week; however, this controversial initiative may still face new technical and political challenges.
Wall Street banks are poised to secure a victory as U.S. President Trump's appointed regulators are set to unveil a draft of the relaxed new capital rules this week; however, this controversial initiative may still face new technical and political challenges.
Michelle Bowman, the Federal Reserve's Vice Chair for Supervision, stated last week that in the proposal to be released by federal regulators on Thursday, capital requirements for large banks will decrease slightly. This marks a surprising reversal for an industry that faced double-digit capital increases under the initial draft proposal in 2023.
The revised “Basel Rules” and “Global Systemically Important Bank (GSIB) surcharge” proposal will recalibrate how banks calculate capital intended to absorb potential losses. This reform stems from years of efforts by Wall Street banks to relax post-2008 financial crisis regulations, which they argue have stifled economic growth. Critics, however, contend that these changes will weaken financial system safeguards amid rising geopolitical and private credit risks.
Industry insiders and analysts indicate that although banks are nearing a victory, finalizing these complex proposals may still take nearly a year. Banks will scrutinize the fine print while regulators must address potential variables, including a new Fed chair and scrutiny from the White House. They also note that differing levels of benefit among banks could lead to internal industry maneuvering to secure further adjustments.
Ian Katz, Managing Director at Capital Alpha Partners, stated: 'You will see hundreds, if not thousands, of pages of documentation. There is a lot to review, and some of it is highly technical.' Despite Bowman’s assurance that agencies will move swiftly, Truist Securities analysts wrote last week that the proposal is unlikely to be finalized before early 2027.
Significant unknowns remain
The Basel Rules implement an international capital standard, focusing on how banks allocate capital for credit risk, market risk, and operational risk. Michael Barr, the former Vice Chair for Supervision, unveiled the first draft in July 2023, arguing that the collapse of Silicon Valley Bank months earlier justified raising capital requirements.
The rule impacts more than 30 banks with assets exceeding $100 billion. Some major banks claimed it could result in capital increases of up to 20%. Banks argued they were already well-capitalized, threatened litigation, and launched an unprecedented campaign to weaken the rule. This effort garnered support from many lawmakers and created divisions among regulators, dragging the issue into the Trump administration, which largely sided with the industry.
Bowman stated last week that these changes will better align requirements with actual risks. The new Basel draft eliminates several measures banks disliked, including the mandate to adhere to the stricter of two methods for calculating risk-based capital—a blow to Wall Street trading giants. It also relaxes requirements for fee-driven businesses like credit cards, which would otherwise have been subject to stringent new operational risk demands.
However, banks are still seeking clarification on other contentious issues, including the extent to which they can use internal models to assess market risk instead of those prescribed by regulators and how much capital they must hold against non-public securities.
The Federal Reserve also plans to adjust the surcharges levied on the eight highest-risk U.S. global systemically important banks (G-SIBs) by updating certain economic inputs and modifying the calculation method for short-term funding risks.
Other analysts noted that banks with the highest surcharges, including JPMorgan (JPM.US), Bank of America (BAC.US), Citi (C.US), Goldman Sachs (GS.US), and Morgan Stanley (MS.US), may benefit, but industry officials warned that significant differences between banks could exist.
Brian Gardner, Stifel's Chief Washington Policy Strategist, stated that the banking industry’s response will depend on how the proposal impacts specific business operations. He added, "Not all large banks are the same."
Political Challenges
Notably, the new draft may also encounter political obstacles. Banks will have 90 days to provide feedback to the agencies, which must jointly agree on any further revisions. Industry sources indicate that at the Federal Reserve level, this requires a vote by its bipartisan committee; if Democratic members consider the final version too weak, they may threaten to oppose it.
The new draft also requires support from Kevin Warsh, whom Trump nominated to replace Federal Reserve Chair Powell. Warsh has not publicly commented on the capital rule changes but is generally inclined toward deregulation. According to an executive order issued by Trump in 2025, the final rule must also undergo review by the White House Office of Management and Budget, adding another potential layer of complexity.
Nevertheless, Jeremy Kress, a professor at the University of Michigan, noted that given both banks and regulators are aligned this time, reaching the finish line should still be 'relatively easier' for the regulators.
Editor/Doris
