The Federal Reserve has significantly scaled back its proposed increase in capital requirements for the largest U.S. banks following pushback from the banking industry and lawmakers.
Michael Barr, the Fed’s top regulator, announced on Tuesday a revised plan that would raise capital requirements for major lenders by 9%, down from the 19% proposed last summer. This adjustment is seen as a victory for the banks, which had launched an aggressive lobbying campaign against the original proposal.
The revision marks a setback for Barr, who had aimed to strengthen the U.S. financial system’s resilience through these reforms. Initially, last summer’s proposal applied to banks with assets over $100 billion, but under the revised rules, most regulations will no longer apply to banks with assets under $250 billion.
Jaret Seiberg, a financial analyst at TD Cowen, described the revision as a "significant win" for the biggest banks. The updated regulations follow a series of high-profile bank collapses in 2023, including Silicon Valley Bank and First Republic, which highlighted vulnerabilities in midsized lenders.
In announcing the changes, Barr said the Fed had been “conservative” in its original proposal but had taken industry feedback into account. The central bank worked closely with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency in formulating the revised plan.
Banks and their lobbyists had fiercely opposed the original “Basel Endgame” rules, arguing that the stricter capital requirements would reduce lending, harm the economy, and disproportionately affect minority communities. They even launched a public campaign warning of the potential impact on “everyday Americans.”
Elizabeth Warren, a progressive senator from Massachusetts, criticised the new plan, calling it a “Wall Street giveaway” that increases the risk of a future financial crisis. She accused the Fed of caving to big bank lobbying instead of bolstering the financial system’s security.
The original package of reforms, known as Basel III, was introduced after the 2008 financial crisis to ensure that banks had sufficient equity to absorb unexpected losses. In 2017, regulators sought to further strengthen these rules to close loopholes, but Wall Street banks have long argued that the Fed’s interpretation of these standards is overly stringent.
One of the key points of contention has been the Fed’s requirements surrounding operational risks, such as cyberattacks and fines, which banks argued were too strict. The revised rules will still include new capital requirements for operational risks but will exclude certain non-lending business activities, such as asset management, thereby reducing the overall capital burden.
The Fed also removed a controversial internal loss multiplier, which would have increased capital requirements based on a bank’s past losses. Additionally, requirements around mortgages and tax equity financing exposure will be eased, and banks will be allowed to use their own models to assess market risks. Barr noted that these changes could positively impact mortgage access.
Barr described the new rules as an “interim step” and emphasised that the Fed would continue to seek feedback before voting on the proposal. He expressed confidence in gaining “broad support” from the Fed’s board of governors, arguing that the revised rules strike a better balance between the costs and benefits of capital requirements.
Fed Chair Jay Powell had previously acknowledged concerns that the 2023 proposal could introduce risks to the banking system and stifle competition. Both Republicans and Democrats had criticised the initial plan. Senator Tim Scott, the top Republican on the Senate Banking Committee, said the original rules would pull money out of the economy and hurt first-time homebuyers and small business owners. Democrats and advocacy groups also voiced concerns that the rules would make it harder for riskier borrowers to access mortgages.
