The US banking industry is gearing up for a significant push to reshape capital regulations under the incoming presidential administration. Emboldened by previous successes in weakening proposed capital increases and anticipating a more favorable regulatory environment, major banks are targeting key areas for reform. These include a substantial reduction in the impact of the “Basel Endgame” capital rule, a decrease in the capital surcharge imposed on global banks, modifications to the supplementary leverage ratio, and a comprehensive overhaul of the Federal Reserve’s annual stress tests.
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Targeting Key Capital Regulations for Reform
Following a period of regulatory tightening after the 2007-2009 financial crisis, large US banks like JPMorgan Chase, Bank of America, and Goldman Sachs are now advocating for a recalibration of capital requirements. They argue that current rules are excessively stringent, hindering their ability to lend and contribute to economic growth. The industry achieved a notable victory last year by successfully lobbying to reduce the proposed capital increase under the Basel framework by half and prompting a review of the Fed’s stress test process.
With the anticipated appointment of industry-friendly officials, including a new Federal Reserve regulatory chief, banks perceive a unique window of opportunity to reshape the regulatory landscape. Recent comments from bank executives, such as Goldman Sachs CEO David Solomon, reflect this optimism, suggesting a potential for “constructive discussion” regarding capital rules.
Banks Cite Resilience and Economic Contribution
Following the challenges of the COVID-19 pandemic and the regional banking turmoil of 2023, large banks emphasize their resilience and critical role in stabilizing the financial system. They contend that their performance demonstrates the effectiveness of existing safeguards and diminishes the need for further regulatory burdens. Executives argue for a more “coherent, rational, holistically assessed regulatory framework” that allows banks to support economic growth without unnecessary constraints.
This renewed confidence is further bolstered by a recent Supreme Court ruling that limits regulatory agencies’ interpretive authority, potentially shifting the balance of power in favor of the banking industry.
Specific Areas for Regulatory Reform
The banking industry’s lobbying efforts are focused on several key areas:
Basel Endgame: While the Fed has already significantly reduced the proposed capital increase under the Basel framework, banks aim to minimize its impact further, potentially pushing the increase closer to zero.
GSIB Surcharge: Banks are seeking additional adjustments to the capital surcharge imposed on globally systemically important banks (GSIBs) beyond the changes already proposed by the Fed.
Supplementary Leverage Ratio: Banks are advocating for exemptions for low-risk assets, such as Treasuries and certain deposits, from the calculation of the supplementary leverage ratio.
Stress Tests: Banks are pursuing increased transparency in the Fed’s stress tests, even resorting to legal action to achieve this goal.
Regulatory Response and Future Outlook
While banks are optimistic about achieving regulatory relief, regulators caution against weakening the financial system. Acting Comptroller of the Currency Michael Hsu acknowledges the need for a balanced approach, emphasizing the importance of maintaining adequate capital levels to safeguard against systemic risk. The upcoming changes in regulatory leadership and the evolving political landscape will ultimately determine the extent of the banking industry’s success in reshaping capital rules.
The industry is actively engaging with Republican regulators and lawmakers to advance their agenda. Early indications from potential appointees, such as Fed governor Michelle Bowman and acting FDIC chair Travis Hill, suggest a potential shift towards a more “pragmatic” approach to bank oversight. This evolving regulatory environment presents both opportunities and challenges for the banking industry and the broader financial system.
