The Federal Reserve recently revealed adjustments to a proposed set of U.S. banking regulations that significantly reduce the additional capital that the largest institutions will be obligated to maintain. Originally, the regulatory overhaul, known as the Basel Endgame, was expected to increase capital requirements for the world’s largest banks by approximately 19%. However, after seeking input 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., decided to revise the proposal to include a more modest 9% increase in capital requirements for big banks. Fed Vice Chair for Supervision, Michael Barr, stated that the adjustments were necessary to strike a better balance between the benefits and costs of heightened capital requirements.
The initial proposal, developed as a response to the 2008 global financial crisis, aimed to enhance safety measures and tighten scrutiny of risky banking activities such as lending and trading. However, by raising the mandatory capital reserves that banks must maintain to mitigate losses, the proposal could have inadvertently led to increased loan costs and restricted access to credit, potentially shifting economic activities to non-bank financial institutions. Industry leaders, including JPMorgan Chase CEO Jamie Dimon, vocalized their concerns and actively lobbied against the stringent requirements. As a result of the collective advocacy efforts, the proposed changes to capital requirements are now more moderate.
In addition to the adjusted capital requirements for large banks, the revised proposal also includes exemptions for regional banks with assets ranging from $100 billion to $250 billion. These regional banks will be spared from the heightened capital requirements, except for a mandate to include unrealized gains and losses on securities in their regulatory capital calculations. This adjustment is projected to incrementally raise capital requirements for regional banks by 3% to 4% over time. This provision is likely a response to the failures experienced by mid-sized banks last year due to deposit withdrawals triggered by unrealized losses on bonds and loans amidst rising interest rates.
The Federal Reserve’s decision to amend the proposed U.S. banking regulations reflects a careful consideration of the feedback received from various stakeholders. By striking a balance between fortifying the resilience of the banking sector and ensuring the availability of credit, the revised regulations aim to foster a stable and sustainable financial system.
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