The Federal Reserve recently announced significant changes to a proposed set of U.S. banking regulations that will have a major impact on the financial industry. The regulatory overhaul, known as the Basel Endgame, was initially introduced in July 2023 and aimed to increase capital requirements for the world’s largest banks by approximately 19%. However, following feedback from banks, business groups, lawmakers, and other stakeholders, the Fed, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp, have decided to revise the proposal.
Fed Vice Chair for Supervision Michael Barr disclosed that the revised proposal will now only include a 9% increase in capital requirements for big banks, significantly less than the original 19% figure. The decision to scale back the capital requirements was driven by concerns about the potential impact on lending and trading activities. By reducing the amount of capital that banks are required to hold as a cushion against losses, the revised proposal aims to strike a better balance between safety and oversight of risky activities.
The original proposal, which was developed in response to the 2008 global financial crisis, faced opposition from industry executives, including JPMorgan Chase CEO Jamie Dimon. The revised proposal is expected to benefit not only big banks but also regional banks with assets between $100 billion and $250 billion. These banks will be excluded from the latest proposal, except for a requirement to recognize unrealized gains and losses on securities in their regulatory capital.
Key aspects of the revised proposal include aligning measures of risk with international standards, reducing risk weighting for tax credit equity funding structures, and recognizing the lower-risk nature of investment management operations. Barr intends to resubmit the proposed Basel Endgame regulations, as well as a separate set of capital surcharge rules for the largest global institutions, starting a new public review process.
Despite the revisions, the industry’s reaction remains divided. Senator Elizabeth Warren criticized the changes, calling them a “Wall Street giveaway” that increases the risk of a future financial crisis. In contrast, the American Bankers Association welcomed Barr’s announcement but emphasized the need for a careful review of the new proposal.
Overall, the revised banking regulations signal a significant shift in the regulatory landscape for financial institutions. The industry’s response and the ultimate impact of these changes remain to be seen as the proposal undergoes further review and potential implementation.
