The Federal Reserve's regulatory chief on Tuesday will outline how officials plan to advance the Basel Endgame bank capital hikes after intense industry opposition delayed the project and sparked divisions among the top federal banking regulators.
In a speech, Fed Vice Chair for Supervision Michael Barr is expected to announce that regulators will reissue a watered-down draft for more industry feedback, in a win for Wall Street banks which have aggressively lobbied to weaken the rule, said analysts and industry officials.
"We are confident that the next step will be a material softening compared to the proposal," said Isaac Boltansky, director of policy research at financial firm BTIG.
The draft rule first unveiled in July 2023 overhauls how banks with more than $100 billion in assets calculate the amount of capital they must put aside to absorb potential losses.
It had originally envisaged hiking capital by around 16% for the more than 30 banks affected, but that figure is expected to fall to single digits, Reuters and other media have reported.
Regulators say the rules will make the banking system safer, especially after three big lenders failed last year.
In public campaigns and conversations on Capitol Hill, Wall Street banks have argued more capital is unnecessary and will hurt the economy. They have threatened to sue to kill the final rule on grounds the Fed and other agencies did not follow the proper procedure.
Bowing to that pressure, Fed Chairman Jerome Powell has said regulators will make "broad and material" changes and that the new draft should be re-proposed for public feedback. But Fed officials have for been at loggerheads with their counterparts at the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) who have wanted to finalize the rule before the election, Reuters reported in June.
Barr's speech indicates the agencies have agreed to a path forward. A key question, though, is whether Barr's plan will do enough to satisfy Wall Street banks and stave off litigation.
"Our view is that the big banks may support the revised proposal if it is moderated as expected as it would provide certainty on capital, which we view as positive for the sector," Jaret Seiberg, an analyst with TD Cowen, wrote in a note.
The Fed is likely to propose the new draft this month, Bloomberg reported on Friday. The central bank is also expected to simultaneously publish its analysis of the impact of the rule.
The prolonged fight means Basel will not be finalized before the Nov. 5 presidential election and could be weakened further or shelved if Republican candidate Donald Trump, who has pledged to ease burdensome rules, re-gains the White House.
Barr will speak at the Brookings Institution, a Washington think tank, at 10 a.m. EDT (1400 GMT) on Tuesday, a rare appearance by a Fed official prior to an interest rate-setting meeting which begins on Sept. 17.
