The Federal Reserve has announced plans to substantially ease the capital requirements for large US banks, marking a significant shift in the implementation of Basel III standards. This pivot reflects the struggle regulators face in balancing the need for financial stability with the competitiveness of banks.
During a speech at the Brookings Institution, Michael Barr, the Fed’s Vice Chair for Supervision, revealed significant changes to the capital rules. The revised framework will halve the expected capital increase for the eight largest US banks, including JPMorgan Chase and Bank of America, from 19 percent to 9 percent.
For other large institutions, the increase will be between 3 and 4 percent. Moreover, banks with assets ranging from 100 billion dollars to 250 billion dollars will be largely exempt from these new requirements.
Heavy pressure on Fed
This regulatory rollback comes in the wake of one of the banking sector’s most forceful lobbying campaigns against the stringent Basel III Endgame standards. The original regulations, banks argued, would not only stifle economic growth but also place US banks at a competitive disadvantage compared to their international peers and non-banking financial entities. The looming threat of litigation and political pressure from both Democratic and Republican lawmakers have seemingly influenced the Fed’s policy shift.
The response to this announcement has been polarised. Critics, including Senator Elizabeth Warren, have decried the Fed’s decision as overly accommodating to the banking industry, potentially increasing the risk of future financial crises.
Warren has described the revised standards as “a gift to Wall Street.” Conversely, the banking sector, while appreciative of the regulatory relief, remains cautious about certain aspects of the new rules.
The impact of the US policy change may extend beyond its borders, potentially affecting regulatory stances in the European Union and the United Kingdom. Both regions are navigating their own Basel III implementation timelines, with the EU delaying enforcement until January 2025 and considering additional postponements for specific trading book rules.
The UK is contemplating a similar delay until the start of 2026. These developments underscore the challenges in balancing financial stability with banking competitiveness.
The final decisions on these modifications by the Fed, along with the FDIC and OCC, are pending, with implementation targeted for 1 July 2025, followed by a three-year transitional period. European regulators will be keenly observing these adjustments as they finalise their own regulatory frameworks.