US banks submit proposal to the Fed for changes to capital rules

The large US banks will formally present to the central bank, this Thursday (18), a proposal from the Fed (Federal Reserve) to reduce the funds they must set aside to absorb possible losses.

This proposal comes in the final stretch of a long reform of US capital rules.

Among the main demands are a reduction in the capital allocated to trading activities on Wall Street, the elimination of the requirement to hold capital for unused lines of credit and new adjustments to reduce the impact of the surcharge charged to globally interconnected banks, according to five industry executives and officials.

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, Representatives spoke anonymously to discuss ongoing regulatory matters and the content of comment letters that have not yet been released.

In March, U.S. regulators, led by the Federal Reserve, released new, looser versions of capital rules that were estimated to reduce big banks' loss-absorbing capital by about 4.8%, arguing that the current rules hurt the economy.

The so-called Basel rules reformulate the way banks measure their risks and, consequently, the amount of capital needed.

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Lenders believe the new proposal represents a dramatic improvement over the central bank's original plan for 2023, put forward by Democratic officials interested in imposing stricter banking rules, which called for a 20% capital increase following regional bank failures.

But after reviewing hundreds of pages of proposed technical changes, lenders have identified problems that they will make a last-ditch effort to fix, the sources said.

The deadline for banks to submit formal comments ends on Thursday (18).

A Fed spokesperson did not respond to a request for comment.

"There is a lot of pressure to complete the process in the next six months because there are other items on the regulatory agenda," said Matthew Bisanz, a partner at Mayer Brown who specializes in financial regulation.

Critics of looser rules argue that lowering banks' capital requirements makes companies more vulnerable to risk and could hurt the economy if financial institutions run into difficulties and restrict lending.

Last month, Phillip Basil, director of Economic Growth and Financial Stability at Better Markets, said in a press release that "robust capital standards are the foundation" of a resilient banking system because they "ensure that banks - not taxpayers, workers or small businesses - absorb losses when risks materialize."

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Trading, credit card changes
Wall Street banks will argue that regulators have been too conservative and direct in allocating capital to trading activities, especially since the Fed annually assesses each bank's risks with its stress tests.

Industry groups will suggest changes that could drastically reduce or even eliminate the additional capital proposed by the Fed for this segment, executives said.

The banking sector is also expected to oppose the requirement to maintain capital equivalent to 10% of unused credit lines, known as "unconditionally cancelable commitments", the most common being unused credit card lines.

Currently, these lines of credit do not require capital as banks can cancel them at any time, but regulators argue that in practice, lenders may not do this in times of economic crisis due to customer relationships or other risk management practices.

Some of the biggest banks will also make another attempt to ease the capital "surcharge" that the Fed imposed on U.S. Global Systemically Important Banks, or "GSIB," following the 2008 financial crisis.

The Fed has proposed a one-time adjustment to account for economic growth since approximately 2019, as well as automatic updates for future growth, which in turn would reduce the size of banks relative to the economy and the resulting surcharge.

But banks will again argue that the adjustment should take into account growth since its inception in 2015, the sources said.

No major challenges
Banks do not plan to push as hard as they did in 2023. Several executives said banks have scaled back their requirements, focusing on the most significant issues.

An industry group has identified nearly 100 problems with the proposal but plans to defend only a few dozen of them, according to a person familiar with the plan.

Reuters previously reported that Fed Vice Chair for Supervision Michelle Bowman, who is leading the rule-making effort, had told banks they should be cautious in their comments, and executives said the industry was eager to put behind them a political dispute that consumed years of time and energy.

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Source: CNN