By Pete Schroeder
WASHINGTON, March 19 (Reuters) – Wall Street bank capital would fall 4.8% under softened rules regulators unveiled on Thursday, freeing up billions of dollars for lending, dividends and share buybacks in a stunning victory for the industry, which had faced double-digit hikes under a previous plan laid out in 2023.
The sweeping proposal changes to how banks calculate funds they put aside to absorb losses should be a boon for Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citibank and other lenders that have fought to overhaul U.S. capital rules, although analysts warned some will benefit more than others.
Capital levels at larger regional banks such as PNC and Truist would fall by 5.2%, the Federal Reserve said, while banks with less than $100 billion in assets would enjoy a 7.8% decline.
In a statement, Fed officials said the changes, which include a rewrite of the contentious “Basel III” draft and adjustments to the “GSIB surcharge” would enhance and streamline the capital framework while ensuring U.S. banks “continue to be safe, sound, and able to support the U.S. economy.”
Critics, meanwhile, say they will weaken financial system safeguards just as geopolitical and private credit risks are surging, with some major U.S. banks tightening lending while funds have capped withdrawals.
Spokespeople for the banks did not immediately provide comment or declined to comment.
‘CREDIT NEGATIVE’
The Fed, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency approved the proposals Thursday, kicking off another potentially frenetic round of industry lobbying as banks gain clarity over how they will fare versus their peers.
The capital overhaul, which is being led by Fed Vice Chair for Supervision Michelle Bowman, follows a years-long Wall Street bank campaign to ease rules introduced after the 2008 financial crisis which they say are excessive and are stifling lending and the economy.
Wall Street bank lobby groups, which have led the fight, issued a cool response on Thursday, noting the draft rules were an “important step forward” and that the industry “will carefully review the proposals and expect to provide feedback.”
Estimates on how much money could be freed up vary.
The eight most interconnected global U.S. banks alone hold around $1 trillion in combined capital. Their required capital could fall around $20 billion, according to Fed estimates, although Democratic Fed governor Michael Barr, who opposed the changes, estimated that figure would be closer to $60 billion when additional policy changes are also considered.
Analysts at Morgan Stanley this month wrote that those lenders along with four other big banks are currently holding around $175 billion in excess capital due to years of uncertainty over where the U.S. rules would land. They could start releasing that via lending, capital markets activity, and buybacks, the analysts wrote.
Bowman, who was appointed by Republican President Donald Trump, said at a Fed board meeting convened to vote on the proposals that the changes would better calibrate requirements in line with risks and that capital will still remain “robust”.
Analysts at Moody’s wrote on Thursday that falling capital would be “credit negative” for lenders, adding: “Given the variation in business models and balance sheet mixtures among U.S. banks, the impact will likely vary significantly by bank.”
UNPRECEDENTED INDUSTRY FIGHT
Regulators have tried for years to implement the “Basel Endgame”, the final piece of international capital standards introduced following the crisis, which focuses on how banks assess and allocate funds to credit, market and operational risks.
Barr, Bowman’s predecessor, had tried to advance a plan that would have hiked capital for some banks by as much as 20%, but lenders launched an unprecedented campaign to weaken the rule, winning over many lawmakers and sowing division among the regulators. That dragged the project into the Trump administration, which has sided with the industry.
The Fed also on Thursday proposed tweaks to the “GSIB surcharge” for Global Systemically Important Banks to be levied on those eight global U.S. lenders by updating some economic inputs and adjusting how short-term funding risk is calculated.
Barr opposed the changes, saying in a statement they were “unnecessary and unwise.”
Banks will have 90 days to respond to the thousands of pages of documents and model the proposals, along with tweaks to other capital levers and banks’ annual “stress test” health checks, to understand the impact on their businesses.
“First impressions are that this is a significant improvement on the previous proposal,” said Scott O’Malia, CEO of the International Swaps and Derivatives Association, which lobbied for changes to Barr’s draft. “But the devil is in the details,” he added.
(Reporting by Pete Schroeder; Editing by Michelle Price, Andrea Ricci, Chizu Nomiyama, Hugh Lawson and Aurora Ellis)
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