U.S. banks are attempting to soften a significant regulatory plan to increase bank capital requirements because they fear it will be too burdensome, especially for institutions that are still recovering from the March banking crisis.
In the wake of the 2007–2009 financial crises, the Basel Committee on Banking Supervision agreed on worldwide capital rules, which bank regulators, led by the U.S. Federal Reserve, are now finalizing.
An element of the proposed proposal that would apply greater capital charges to non-interest revenue, such as the fees lenders charge for credit card services or investment banking, is of particular concern to bankers.
This capital charge is a component of the Basel Committee’s 2017 package, but the industry claims it exaggerates the risk for banks with significant non-interest income and had hoped U.S. regulators would lessen its effects, according to the sources.
Banking organizations are urging regulators to cap the percentage of assets to which such charges would apply, although it is uncertain whether the agencies will take that stance.
One industry official observed that many lenders’ expansion strategies have recently placed a major emphasis on non-interest services income.
According to a 2022 blog post by Washington-based organization the Bank Policy Institute; banks with a high proportion of non-interest revenue include American Express, Morgan Stanley, and the U.S. branches of UBS, Deutsche Bank, and Barclays.
Deutsche Bank, Morgan Stanley, and Barclays all declined to comment. American Express and UBS declined to comment right away.
Fed Chair Jerome Powell told Congress on Wednesday that banks need to maintain substantial capital, but that regulators must be aware of the trade-offs.
Wall Street collapse
Although the Basel criteria were agreed upon years ago, the United States is currently drafting legislation to comply with them in the wake of this year’s financial crisis, which led to the failure of Silicon Valley Bank and two other lenders due to deposit run issues. The proposal is the first significant regulation under the direction of Fed Vice Chair for Supervision Michael Barr, who has started a thorough examination of capital standards and is anticipated to be severe on Wall Street.
According to Isaac Boltansky, director of policy research for brokerage BTIG, “the baseline has changed to an assumption that the scale and scope of the proposal are going to be far more punitive than anyone expected at the end of last year.”
Industry leaders contend that poor management and liquidity problems were to blame for the bank collapses and that there is already enough capital in the system.
The proposal is also anticipated to impose stricter capital requirements on smaller lenders with assets of over $100 billion, some of whom may have had liquidity issues this year.
According to bankers, raising capital now could backfire, placing pressure on banks and hampering lending, given investor worries regarding the soundness of the sector and the general economy.
Republican lawmakers on Wednesday also brought up concerns about capital rules with Powell. Republican officials at the agencies have voiced similar issues, according to two people.
In a period of considerable uncertainty, it is crucial for the agencies to keep in mind the economic costs, according to Kevin Fromer, CEO of the Financial Services Forum, whose members are the eight largest banks in the nation, with a combined capitalization of around $900 billion.
“Raising capital requirements on institutions that are already well-capitalized is not in the interest of the U.S. economy.”
Together with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), the Fed is formulating the Basel guidelines. The proposal was supposed to be unveiled this month, but five people claimed the deadline has been pushed out to later in July because staff members are still working on the draft.
Neither the FDIC nor the OCC would comment.
Acting Comptroller Michael Hsu told reporters last week that banks had “not been shy about sharing their concerns” and that authorities were taking their issues into consideration.
