Fed’s Barr Unveils Major Changes to Bank Capital Plans After Pushback, Delays

The new banking plan aims to increase the capital reserves of large banks by 9%, a reduction from the original proposal of 19%, as stated by Michael Barr. It will also enhance capital requirements for smaller banks with less than $250 billion in assets—such as KeyBank, M&T, and Fifth Third—by 3% to 4%. This adjustment is intended to address the volatility stemming from unrealized gains and losses in their securities portfolios, which contributed to last year’s upheaval in the banking sector. Barr noted that these smaller institutions would generally be exempt from the Basel regulations.

Barr highlighted the balance between the benefits and costs of raising capital requirements, emphasizing that the planned changes aim to reconcile important objectives based on feedback from various stakeholders, including academics and industry representatives.

Despite the revisions, the initial reaction from the market was tepid. A decline in bank shares and a reserved response from bank lobby groups indicated that investors had anticipated a smaller increase in capital requirements. During a recent Barclays investor banking conference, many banks lowered their third-quarter earnings expectations, influencing the stock market performance of major banks such as JPMorgan Chase, which saw a drop in share prices between 2% and 6%. The banking index fell 3.5%, nearing a one-month low.

Stephen Biggar, a banking analyst at Argus Research, expressed disappointment at the market’s negative reaction, suggesting it may have been driven by expectations for a more significant reduction from the original capital hike proposal.

As the changes move forward, they will be subject to additional public commentary, likely triggering further lobbying efforts that could lead to additional modifications of the rules. Daniel Pinto, President of JPMorgan Chase, noted the uncertainty surrounding the specific adjustments made to how market risks are assessed.

Regulators argue that these new rules will enhance the safety of the banking system, especially following the collapse of three major lenders last year. However, some Democrats have criticized the Federal Reserve, claiming the changes are too lenient on the industry. Senator Elizabeth Warren referred to the revised standards as a “Wall Street giveaway,” asserting that the Fed capitulated to lobbying from large bank executives.

In public discourse, Wall Street banks maintain that increased capital is unnecessary and may hinder economic growth. They have hinted at legal action to challenge the final rule, alleging that proper procedures were not followed in its formulation.

Fed Chair Jerome Powell responded earlier this summer, pledging significant changes and ensuring that the new draft would be reopened for public feedback. However, there is discord among regulators, particularly between the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), with differing agendas on the timing and finalization of the rule.

Key concerns revolve around whether Barr’s plan will be sufficient to prevent legal challenges and whether the OCC and FDIC will lend their support. Jonathan McKernan, a Republican member of the FDIC board, stated he would not endorse Barr’s plan, citing that it fell short of addressing all necessary issues. Meanwhile, FDIC Chairman Martin Gruenberg and acting Comptroller Michael Hsu affirmed their commitment to revising the proposal collaboratively.

The FDIC is set to convene later this month to discuss the plan. The ongoing deliberations imply that finalizing the Basel regulations before the Nov. 5 presidential election is unlikely, and they could face further modification or potential postponement should Republican candidates, who advocate for easing regulatory burdens, gain a foothold in the upcoming election.