"Bad For America" - Mid- & Big-Banks May Face 20% Jump In Capital Requirements

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by Tyler Durden
Monday, Jun 05, 2023 - 07:00 PM

U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.

The Wall Street Journal reports, citing people familiar with the plans, the changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average.

Banks with at least $100 billion in assets may have to adhere to new requirements, lower than the existing $250 billion threshold, for which regulators have reserved their most stringent rules, according to the Journal.

Banks that are heavily dependent on fee income - such as that from investment banking or wealth management - could also face large capital increases.

Fed Vice Chair for Supervision Michael Barr signaled to House lawmakers in May that he believes capital requirements should be higher.

The banking system might need additional capital to be more resilient precisely because we don’t know the nature of the kinds of ways we might experience shocks to the system, as has happened with these recent bank failures."

Barr has previously said that US officials are reviewing bank capital requirements and committed to putting in place strictures that align with Basel III.

Bloomberg reports that the biggest banks have argued that their steadiness in the recent turmoil showed their strength and that they already have more than enough capital. The six biggest US firms have added more than $200 billion to their capital reserves in the last decade, and JPMorgan said last month that its total loss-absorbing capacity now exceeds the loan losses that all US banks had during the financial crisis.

“Higher capital requirements are unwarranted,” said Kevin Fromer, the chief executive of the Financial Services Forum, which represents the largest U.S. banks.

“Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time.”

JPMorgan CEO Jamie Dimon has been among critics blasting more cumbersome capital requirements, calling the upcoming increase “bad for America” last year ahead of a pair of congressional hearings.

The coming proposal is the last piece of capital rules that global policy makers agreed to implement after the 2007-09 financial crisis. The overhaul forced banks around the world to boost their capital cushions in hopes of making them better prepared to weather downturns without taxpayer bailouts.

Nathan Dean, Bloomberg's senior government analyst noted that:

“The last remaining piece of Basel III, known informally as the Basel III endgame, would alter capital levels for US banks as regulators recalibrate risk-weighting of assets and restrict internal models used to calculate both credit and operational risk.”

All three agencies (The Fed, OCC, and FDIC) are expected to seek comment on the proposed capital rules.

They would have to vote again to complete the changes, likely implementing them over the coming years.

However, JPMorgan said at its investor day that while the final pieces of Basel III capital rules - which some investors have referred to as Basel IV because they could be so extensive - may be proposed soon, they’re unlikely to be implemented before early 2025.