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US bank regulators have proposed stricter capital requirements for large lenders, potentially necessitating the allocation of tens of billions of additional dollars collectively among the country’s six biggest institutions to cover potential losses.
Upon hearing the news, shares of JPMorgan Chase and other major banks initially rose on Thursday. However, the gains were reduced when industry groups stated that the regulations would be more expensive than initially estimated. The only exception was Citigroup, whose shares increased by 2%.
Earlier in the week, Morgan Stanley analysts estimated that Citi would need over four years to comply with the regulations without significant changes, twice as long as many of its competitors.
The regulators stated that banks will have until the beginning of 2028, roughly four and a half years, to fully comply with the rules. They believe this timeframe will allow for adjustments while minimizing potential negative impacts.
The proposed rules, put forth by the US Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, will apply to banks with assets exceeding $100 billion. These regulations represent the most comprehensive effort in over a decade to strengthen the financial system.
The new rules would establish an industry standard for measuring lending and other activities’ risk, replacing the individual risk measurement allowed for banks. The uniform standards are more conservative, compelling banks to maintain more capital in case of losses.
The regulators explained that the proposal aims to enhance the resilience of the US banking system by adjusting capital requirements for large banking organizations to align better with their risks and establish more transparent and consistent standards.
The rules will exempt smaller institutions such as community banks but include larger regional lenders not previously subject to stringent capital requirements to absorb losses.
Regulators believe the new rules will minimize the financial distress experienced in 2008 and the recent spring turmoil, which led to three of the four largest failures of federally insured banks in US history. The regulatory overhaul also seeks to align the US with international standards, known as Basel III endgame reforms, which many jurisdictions have already implemented.
The projected average increase in capital requirements for global systemically important banks (G-Sibs) is 19%. However, several bank industry groups contest these projections, stating that the rules would obligate them to set aside more capital than suggested by regulators.
The Bank Policy Institute estimates that the new rules could potentially require the largest US banks to raise their capital reserves by up to 24%.
On Thursday, the Federal Reserve Board of Governors gathered to discuss the proposals. Chair Jay Powell expressed support for the changes but acknowledged the need to strike a balance between safeguarding the banking system and the associated costs of higher capital requirements.
Not all officials are in agreement. Governor Michelle Bowman cautioned against “harmful, unintended consequences,” including reduced competition and restricted lending.
Another governor, Christopher Waller, also expressed concern, believing that the proposals could “increase the cost of credit and impede market functioning without clear benefits to the resiliency of the financial system.”
The Financial Services Forum, a lobbying group for major US banks, argued that the new rules would harm the US’s competitiveness in comparison to other economies, resulting in more expensive or less available loans and financial services than in Europe and elsewhere. The group’s leader, Kevin Fromer, emphasized the need for regulators and policymakers to consider the proposal’s detrimental economic impact.
The rules are currently open for public comment until November 30 and are expected to be finalized next year.
Under the proposed changes, all banks with assets exceeding $100 billion would need to account for a larger portion of their market losses, even if they are only unrealized on paper, in their capital ratios. Silicon Valley Bank, for instance, collapsed due to a significant amount of unrealized losses on its bond portfolio. The regulations would also require banks to increase their capital reserves when regulators anticipate a recession or other forms of stress in the economy.
Banks would also need to hold capital against operational risk, potentially impacting banks with extensive asset management divisions or other non-lending and trading divisions that were not previously considered for capital requirements. Consequently, American Express shares, which generate income from payment processing fees, fell by nearly 1% on Thursday.
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