Since Washington regulators have unveiled a sizable reform package of post-financial crisis capital regulations, banking industry advisers are focusing on the provisions they see as most disruptive, such as risk management requirements that may have an impact on wealth management, consumer credit, and lending for real estate.
On July 27, the top three bank regulators in the United States presented a 1,000-page revamp that would force banks to collectively set aside an additional 16% in capital that the regulators believe is required to strengthen the financial system.
The new rules would force banks to keep proportionately more capital by increasing the level of risk associated with particular assets, which might reduce returns on equity and earnings. Industry lobby organizations like the Securities Industry and Financial Markets Association, the Financial Services Forum (FSF), and the Bank Policy Institute have claimed that this will make it more difficult to lend to customers and warn that it will slow the economy.
Despite the fact that three of the four biggest bank failures in U.S. history occurred in the spring of 2023, the FSF responded to the idea by claiming that the Federal Reserve’s own stress testing revealed the biggest banks were sound and properly funded, making it “a solution without a problem.”
Analysts of the industry identify areas that the well-funded bank lobby will be ready to redraw.
Joe Saas, senior vice president for balance sheet risk at financial services giant FIS, said that the proposal’s change from a uniform risk fee to a variety of risk levels to be given to various assets for rental-backed real estate financing would probably be “circled for push-backs.”
Increasing the cost of such lending will reduce the amount of credit accessible to traditionally underserved borrowers; the industry is likely to contest this, he added.
The new regulations perceived high-revenue business lines as having a higher risk, according to Chen Xu, an attorney in Debevoise & Plimpton financial institutions group.
He continued, “Some fee-based businesses will need to allocate more capital even if there is no balance sheet risk,” adding that this could affect trading in the capital markets.
Financial instability, according to reform advocates, is the real threat to the wellbeing of the people.
For this report, representatives of the Fed declined to comment. However, Fed Vice Chair for Supervision Michael Barr stated when the plan was announced that “extensive analysis” showed the advantages of a sound financial system “outweigh the costs to economic activity” that may be associated with retaining additional capital.
Only a few major banks have offered comments on the concept. It was “hugely disappointing,” according to Jamie Dimon, CEO of JPMorgan Chase (JPM.N), who also asserted that it was poorly structured and would reduce access to credit for individuals and small businesses.
In a regulatory filing dated August 1 that stated the suggestions were expected to change the risk gauges for lending and lead to a net increase in its capital requirements, Wells Fargo (WFC.N) stated it had nothing further to say.
A Citigroup (C.N) spokesperson declined to comment. A request for comment from Bank of America (BAC.N) was not met with a response.
The new risk-weight criteria may push more business to non-bank lenders outside the purview of regulators, according to Kevin Stein, a senior adviser at the financial services advisory firm Klaros Group.
The July proposal was six years in the works, giving the bank lobby plenty of time to prepare for this conflict. The Basel Committee on Banking Supervision, which is made up of regulators from major economies, agreed to the Basel III “Endgame” reforms in 2017, and they are planned to be put into effect.
The biggest banks may need up to four years to stash aside profits in order to comply with the higher capital requirements, according to Morgan Stanley (MS.N) analysts. The largest lenders, according to Richard Ramsden, a Goldman Sachs (GS.N) analyst who covers large banks, face an unexpectedly difficult climb.
According to Ramsden, the rise in risk-weighted assets corresponds to an increase in capital needs of $135 billion, or 200 basis points of tier-one common stock capital for the largest banks.
The chairman of the organisation advocating for financial reform, Dennis Kelleher, noted that the banking sector had previously raised similar objections, which, in his opinion, had shown to be unjustified.
Wall Street is skilled at concealing its special interests behind other people’s worries, which it stoked with deceptive statements and scare tactics, the speaker claimed.
