U.S. regulators launched an ambitious effort that would order large banks to set aside billions more in capital to guard against risk Thursday, although a lukewarm response from the head of the Federal Reserve raised questions about how the plan might change before its completion.
The Fed, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency all agreed to put the over 1000-page proposal out for public feedback, which the banking industry is already hotly criticizing. The industry is already warning that such a big hike could force them to trim services, raise fees, or both.
In a statement, Fed Chair Jerome Powell said he supported putting the proposals out for comment, but quickly detailed numerous questions with the plan, saying regulators have a "difficult balance" to strike.
"Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary," he said.
Powell has said in the past the regulatory agenda at the Fed is primarily set by Vice Chair for Supervision Michael Barr, who helmed the proposal. But his measured support looms large at an agency that prioritizes consensus whenever possible. Several officials noted an interest in receiving feedback on the proposal, suggesting changes will be forthcoming.
"This is the high-water mark for how onerous we expect these capital requirements will be for the regional and mega banks. Changes in response to comments should moderate these proposals, though the impact will remain material for the big banks," said TD Cowen analyst Jaret Seiberg in a research note.
The proposal marks the first in an extensive effort to tighten bank oversight, particularly in the wake of spring turmoil that saw three large financial firms fail.
Barr said he would be mindful of incoming comments on the proposal, but underlined Thursday the need for robust capital.
"Neither regulators nor bank managers can anticipate all risks, or how risks may be amplified and propagated," he said in prepared remarks.
The package was opposed by Republican officials at the Fed and FDIC, who argued it was misguided and onerous. Those concerns have been echoed by banks and Republican members of Congress ahead of the plan's release, signaling a bumpy and long road ahead to finalizing the massive overhaul.
The effort is expected to span years, with regulators soliciting comment until November 30, with plans to fully implement the new rules by the middle of 2028.
The proposed rule, which would implement a 2017 agreement from the Basel Committee on Banking Supervision, aims to overhaul how banks gauge their riskiness, and in turn how much reserves they must keep as a cushion against losses.
Specifically, the plan changes risk gauges for bank lending, trading activities and internal operations. In several cases, the plan would scrap the use of bank internal models to measure various types of risk, instead opting for a standardized approach, which regulators argue would produce more consistent and comparable results, and also raise overall capital.
The proposal also reverses previous relief for banks with over $100 billion in assets, after several midsized firms failed in the spring. Under the plan, banks of that size would have to account for unrealized gains and losses on available-for-sale securities, as well as adhere to a stricter leverage requirement.
That change would be felt most acutely by banks with between $100 billion and $250 billion in assets, such as Citizens Financial Group (CFG.N), Fifth Third (FITB.O), Huntington (HBAN.O) and Regions (RF.N) which enjoyed several relaxed rules under changes implemented in 2019.
The S&P index of bank stocks (.SPXBK) was down 0.9% in afternoon trading, reversing earlier gains.
The Securities Industry and Financial Markets Association said a proposed operational risk capital charge would penalize firms’ fee-based wealth management and investment banking activities.
"Imposing a punitive capital charge on businesses that provide steady fee income is misguided," said SIFMA president and CEO Kenneth E. Bentsen, Jr in a statement.
Top officials at banks like JPMorgan Chase (JPM.N), Bank of America (BAC.N), and Morgan Stanley (MS.N) have warned stricter rules could force them to pull back from services or increase fees. Analysts say it could take years of retained earnings to comply, pinching their ability to boost dividends or buy back shares.
Agency officials said Thursday most banks already have enough capital to meet the proposal, and firms that need to catch up would need at most two years of retained earnings to do so.
Separately, the Fed also unveiled several technical adjustments to the surcharge it assesses on large global banks. Fed staff said the changes, which generally make calculating the surcharge more granular, would result in an additional $13 billion in capital requirements for the eight largest banks.
