After a wave of bank failures in the US last year, the United States sought to strengthen bank regulation and intended to significantly increase capital requirements. However, following strong lobbying efforts by the banking industry, the US Federal Reserve (Fed) reportedly plans to relax the bank capital reform plan, reducing the capital requirement increase to only 5%, far below the original proposal’s average of 16%.
[Background]
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The US regulatory agency aimed to increase the capital requirements for large banks by an average of 16% in mid-July last year. At that time, most banks warned that such a significant increase in capital requirements might force them to cut services or raise fees, or both.
At that time, the capital requirements for the largest banks in the US were expected to increase by an average of 19%
The capital requirements for banks with assets of $250 billion or more were expected to increase by an average of 10%
The requirements for banks with assets between $100 billion and $250 billion were expected to increase by an average of 5%
The Fed’s document did not provide the latest estimates of how much additional capital large banks would need to buffer against financial shocks, but sources indicated that preliminary calculations suggested the proposed modification could cause the capital requirement increase to be only 5%, far below the original proposal of 16%.
This policy concession would be a huge victory for Wall Street banks. Since the proposal was announced in July last year, Wall Street banks have been engaged in intense lobbying. If the modification is adopted, it will be more likely to achieve the Fed Chairman Powell’s goal of broader support by the board of governors.
Two Republican-appointed Fed governors previously warned that the initial version might increase loan costs, affect the US economy, and put the US banking industry at a disadvantage relative to international competitors.
Powell hinted earlier this year that the capital requirement proposal would undergo “broad and substantive modifications,” a position echoed by Michael Barr, the Fed’s vice chairman and one of the original designers of the initial version of the proposal.
Officials are still discussing the revised proposal, and it is unclear whether an agreement can be reached before the November presidential election. Michael Barr has already met with senior officials from the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to discuss the possibility of reducing the bank’s capital requirements.
Some sources indicated that senior officials from the OCC and FDIC are generally open to relaxing the capital requirements for “market risk,” but privately expressed opposition if the increase is too low.
The main purpose of the US bank capital reform is to respond to Basel III, an international agreement that emerged after the 2008 financial crisis aimed at preventing bank failures and similar crises. Supporters believe that the US reform plan can address some of the issues exposed by the banking crisis last year.