US regulators kick off contentious effort to hike bank capital

kim kardashian

U.S. regulators have launched an ambitious effort to order large banks to increase their capital reserves to protect against risk. However, the response from the head of the Federal Reserve has raised doubts about potential changes to the plan before its completion.

The proposal, put forward by a trio of U.S. bank regulators, aims to raise capital by 16% overall and would involve a significant overhaul of how banks measure risk and determine the amount of capital they must hold.

The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have agreed to seek public feedback on the over 1000-page proposal. However, the banking industry is already criticizing the plan, warning that such a substantial increase in capital requirements could lead to service cuts, fee hikes, or both.

Fed Chair Jerome Powell expressed support for seeking public comment on the proposals but also highlighted numerous questions and challenges associated with the plan. He emphasized the need to strike a difficult balance between maintaining a strong financial system and avoiding unnecessary burdens.

While Vice Chair for Supervision Michael Barr led the proposal, Powell’s measured support carries significant weight within the agency, which prioritizes consensus. Several officials have expressed an interest in receiving feedback on the proposal, indicating that changes are likely to be made.

Analysts anticipate that the proposed capital requirements for regional and mega banks will be moderated in response to comments. However, the impact on these large banks will still be significant.

This proposal is part of a broader effort to strengthen bank oversight, particularly following the failure of three major financial firms earlier this year.

The implementation of the new rules is expected to take years, with regulators accepting public comments until November 30 and aiming to fully implement the changes by mid-2028.

The proposed rule, which aligns with a 2017 agreement from the Basel Committee on Banking Supervision, seeks to revamp how banks assess risk and determine reserve requirements. It includes changes to risk gauges for lending, trading activities, and internal operations. The plan would replace the use of bank internal models with a standardized approach to produce more consistent and comparable results and increase overall capital.

The proposal also eliminates previous relief measures for banks with over $100 billion in assets, requiring them to account for unrealized gains and losses on available-for-sale securities and adhere to stricter leverage requirements. Banks with assets between $100 billion and $250 billion, such as Citizens Financial Group, Fifth Third, Huntington, and Regions, will be particularly affected by these changes.

The stock index of bank stocks experienced a 0.9% decline in afternoon trading following the proposal’s announcement.

The Securities Industry and Financial Markets Association (SIFMA) expressed concerns about a proposed operational risk capital charge, arguing that it would penalize firms’ fee-based wealth management and investment banking activities.

Officials at major banks like JPMorgan Chase, Bank of America, and Morgan Stanley have warned that stricter rules could lead to service reductions or fee increases. Compliance with the new regulations may require years of retained earnings, limiting their ability to boost dividends or repurchase shares.

Regulatory agencies have stated that most banks already have sufficient capital to meet the proposal’s requirements. For those that need to catch up, it is estimated that they would require a maximum of two years of retained earnings.

In addition to the capital requirements proposal, the Federal Reserve has also announced technical adjustments to the surcharge imposed on large global banks. These changes, which provide more detailed calculations for the surcharge, would result in an additional $13 billion in capital requirements for the eight largest banks.

Overall, the proposal represents a significant step in tightening bank oversight and implementing stricter capital rules. However, it is expected to face challenges and potential modifications as it progresses through the feedback and implementation stages.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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