Federal Reserve to cut capital requirements for large banks under new Basel III proposal

The US Federal Reserve on Tuesday previewed a scaled-down version of its proposed capital requirements for America's largest banks, after its original Basel III guidelines faced major opposition.

Under the new proposal, the eight biggest US banks, the so-called global systemically important banks – such as Goldman Sachs, Bank of America and JP Morgan Chase – would need to increase their capital by 9 per cent to act as a buffer against financial shocks, compared to a 19 per cent increase under the earlier proposal.

Other large banks, that are not considered global systematically important, would have to increase their capital by between 3 per cent and 4 per cent.

Banks with assets of between $100 billion and $250 billion would be exempt from the mandates other than a requirement to recognised unrealised gains and losses.

“It is critical that banks have the capacity to continue lending to households and businesses through times of stress. Bank capital is a key component of this resilience,” Fed vice chairman for supervision Michael Barr said at the Brookings Institution in Washington.

The new proposal is part of the Basel III endgame accord, an international regulatory framework for banks first agreed on after the 2007-2008 global financial crisis. The UAE implemented the Basel III endgame in 2017.

The Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation presented their initial proposal last year. It was criticised by myriad interests during the initial comment period.

The Financial Services Forum, a lobbying group for banks, said the Fed's 2023 proposal would mean higher borrowing costs and fewer loans for consumers and businesses. Others opposed to the rules said the move would hurt small businesses, homebuyers and minorities, while also harming energy projects and capital markets.

Wall Street also led a furious lobbying campaign against the proposals, flooding TV airtime with adverts attacking the proposed changes. Chief executives of the eight largest US banks also testified before Congress in December 2023 to challenge the reforms.

Following the criticism, Mr Barr and Fed Chairman Jerome Powell said there would be “broad and material” changes to the proposal. Mr Powell also attended a closed-door meeting with a group of banking executives in an effort to avoid a protracted legal battle over the proposal.

The US regulators' proposal has much stronger capital requirements than bank regulators in the EU. The Bank of England plans to publish its “near final” interpretation of the Basel III regulations on Thursday.

“The record of comments on the proposal includes a substantial amount of detailed and significant comments from a diverse range of industries – almost all of which express reservations about at least some aspects of the proposal,” Latham and Watkins said in a February report.

Mr Barr said the changes “reflect the feedback we have received from the public, improve the tiering of the proposal, and better reflect risks”.

He did not say when the Fed would officially put the new proposal forward. Banks would have one year to begin the implementation process once the rules are finalised. The original date was July 2025.

The complete changes to the proposal could be released as soon as September 19, Bloomberg reported.