Analysis: Uncertainty Surrounds New US Bank Capital Rules Amid Upcoming Election By Reuters

By Pete Schroeder

WASHINGTON – Investors, analysts, and executives in the U.S. banking sector were grappling on Wednesday with the potential impact of revised capital requirement hikes, facing considerable uncertainty over the specifics that may emerge from the Federal Reserve and other regulators, alongside the upcoming presidential election adding an unpredictable factor.

The Fed’s regulatory chief, Michael Barr, announced a plan on Tuesday to increase capital requirements for large banks by 9%, a reduction from an earlier proposal that suggested a 19% hike. This change was viewed as a significant concession to Wall Street banks that had been advocating for a less stringent approach to the “Basel” draft.

The central bank is expected to release the updated version soon and begin soliciting feedback from the industry.

Despite what appeared to be a win for the banking sector, experts and regulatory sources noted that the plan remains clouded in uncertainty, as key details are still not clear and the impending Nov. 5 election raises questions about whether the proposal will be enacted by a new administration.

Speaking at the Brookings Institution in Washington, Barr indicated that there was no urgency to finalize the rules ahead of the election. Democratic candidate Vice President Kamala Harris has called for stringent banking regulations, while Republican candidate Donald Trump has vowed to reduce regulatory burdens.

If Trump were to win, he could quickly appoint Republican officials at banking agencies who might choose to abandon the plan altogether. In contrast, a Harris administration would likely finalize or potentially strengthen the proposal, according to analysts and industry insiders.

“The future of this proposal is intricately tied to the presidential election,” said Ian Katz, managing director of policy research firm Capital Alpha Partners. “A Basel agreement might be achievable under Republican regulators, but it would look different and likely be less burdensome for the banks.”

The revised capital requirements did not lift bank stocks on Tuesday, as the banking index closed down 2.88% due to concerns about economic growth, the future of Fed interest rate cuts, and the banks’ earnings outlook.

“The new capital requirements are significantly lower than the initial proposal, which should positively influence prospects for earnings growth. However, most of that optimism is being overshadowed,” said Brian Mulberry, a portfolio manager at Zacks Investment Management, which holds several bank stocks.

In discussions with lawmakers and regulators, Wall Street banks have asserted that increased capital reserves are unnecessary and would hinder economic performance. They have threatened legal action to block the final rule, arguing that the Federal Reserve and other agencies did not follow proper procedures.

In response, Fed Chair Jerome Powell stated this summer that regulators would implement “material” changes and reintroduce the new draft for public comment. Fed officials have been at odds with their counterparts at the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), who have expressed a desire to finalize the rule before the election.

While Barr indicated the Fed board would support his revised plan, it remains uncertain whether the OCC and FDIC would do likewise. Both FDIC Chairman Martin Gruenberg and acting Comptroller Michael Hsu acknowledged Barr’s initiative as a joint effort and committed to completing the work, though they did not outline their next steps.

Jonathan McKernan, a Republican member of the FDIC board, expressed his intention to oppose Barr’s plan, believing it does not adequately address existing issues. Legal experts warned that an unclear or unconventional rollout of the proposal could leave it open to litigation.

“Potential legal challenges and the timeline for finalization following the election raise the uncertainty surrounding this rule,” noted Ed Mills, an analyst with Raymond James. Nonetheless, he emphasized that “the proposals outlined today should be seen as a significant positive for the banking sector.”

Signaling the ongoing uncertainty and the substantial capital increase facing banks, industry groups refrained from declaring victory. Most stated they would analyze the new draft once it is released, having spent the past year negotiating the rule’s specifics and contending that the Fed has significantly underestimated the capital burden on large lenders.

Barr outlined broad changes to how the new draft would assess banks’ credit, market, and operational risks. However, executives and regulatory sources indicated that the specific language used will determine which banks benefit or suffer, depending on their business models.

“The devil will be in the details for this proposal, and we will need to see the actual proposal before making any final assessment regarding its impact,” Mills concluded.