The revamped set of capital rules in the planned Basel III endgame reproposal should be more palatable for the banking industry.
In a Sept. 10 speech, Vice Chair for Supervision Michael Barr said he would propose to the Federal Reserve Board an updated plan that would increase common equity Tier 1 capital requirements for global systemically important banks (GSIBs) by 9% in the aggregate as opposed to 19% in the original proposal. The next largest group had been expecting to see a 6% increase, but Barr said they are now estimated to see only a 3%-4% increase.
The changes came after the original proposal from July 2023 received strong pushback from banks, other industries and members of Congress on both sides of the aisle. The scope of the original proposal along with the backlash surprised onlookers.
"Such a sweeping overhaul of a major regulatory proposal is rare, if not unprecedented, for the Fed in recent history," Ian Katz, managing director at Capital Alpha Partners LLC, wrote in a note Sept. 10. "But the intensity of the pushback from industry and lawmakers was also unprecedented."
If approved by the Fed Board, the reproposal would need to go through at least a 60-day comment period and will not be completed before US Election Day. But it has a chance of being finalized this year or early next year.
"We think there's only a small chance a reproposal would be finalized as a rule before Inauguration Day, Jan. 20, 2025," Katz wrote.
While more steps are needed, executives from Regions Financial Corp. said the expected reproposal would give the company more capital flexibility. They and others also noted that Barr's speech provided some clarity.
"After more than a year of uncertainty regarding the complexion of final rules, we welcome any further steps forward that get us toward the finish line of actual rules of the road," Piper Sandler analysts wrote in a Sept. 10 industry note. "Plus, we would view a much lower capital hit as a win for the industry on this contentious issue."
The most significant takeaways include, first, the reduced increase in capital and, second, keeping banks with $100 billion to $250 billion in assets out of the rule except for having to include accumulated other comprehensive income (AOCI) in regulatory capital, the Piper Sandler analysts also wrote.
J.P. Morgan analysts saw the planned AOCI change as positive but noted missing details about the expected reproposal.
"It is unclear how much of this reduction in the capital increase is for trading activities, what are the details of the changes in the various areas, and hence what is the distribution of the reduction in capital increase among GSIBs," the J.P. Morgan analysts wrote in a Sept. 11 note. "Overall, the changes to the proposal are positive as they temper the capital increase and yet keep the addition of AOCI for the next tiers of banks."
Winners and losers
GSIBs that focus more on traditional banking, such as Bank of America Corp. and Wells Fargo & Co., will probably have the smallest capital increases, and the same goes for the trust banks, Senior Analyst Jim Mitchell at Seaport Research Partners wrote in a report Sept. 10. Meanwhile, those with more trading exposure, such as Goldman Sachs Group Inc. and Morgan Stanley, likely will have the largest increases.
"Although we don't have all the details, it seems like credit risk [risk-weighted assets] could see little change (if not decline) under the new proposal compared to the current Basel III regime (and materially lower than the original Basel III endgame proposal)," Mitchell added. "These changes should particularly benefit the money center banks that have large mortgage and card portfolios."
GSIB surcharge
In the Sept. 10 speech, Barr also described plans for a new GSIB surcharge proposal.
The J.P. Morgan analysts said the planned surcharge will "see one major positive change" and that J.P. Morgan's management estimated GSIBs held an excess of $59.2 billion in capital because economic inputs were anchored to 2015.
A new inflation adjustment could make a significant difference in how much capital GSIBs must hold.
"The major takeaway regarding the surcharge is that the Fed will finally index its calculation for GDP growth and inflation," Seaport's Mitchell wrote. "In other words, a bank's GSIB surcharge should not change simply because the economy has grown, as has been the case in the past. While there are a lot of moving parts in the GSIB calculation, logically it should mean that those with less balance sheet growth in recent years should benefit more," such as Wells Fargo and Citigroup Inc.
Fed's responsiveness, implications for other rules
Bank advisers saw the changes being a sign that the Fed is attentive to industry concerns.
"It's clear the Fed doesn't want a protracted fight on this — there was no appetite for that," Max Bonici, counsel at Venable LLP who advises financial institutions on various regulatory matters, said in an interview. "There seems to be a bit of reconciliation ... in their approach here."
The Fed's new plan seems to be a reaction to industry criticism of the original proposal.
"They were responsive to a lot of the industry and political and other pushback they received, which is a good thing," John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics, said in an interview. "They should listen to what others have to say about what they're proposing and the impacts, intended or unintended."