Regulators announce ‘Basel III endgame’ rules for large US banks

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US bank regulators have advanced plans to impose more arduous capital requirements on the country’s large lenders, which could require the six biggest institutions to put aside additional tens of billions of dollars collectively for potential losses.

Shares of JPMorgan Chase and other big banks initially rallied on Thursday following the news, but then pared their gains after some industry groups said the regulations would be more costly than regulators suggest. The one exception was Citigroup, which closed 0.8 per cent higher.

Earlier this week, analysts at Morgan Stanley had estimated that Citi would need more than four years to comply with the new regulations without making any major changes, or about twice as long as many of its rivals.

On Thursday, regulators said they would give banks until the beginning of 2028, or almost four and a half years, to fully comply with the rules. They predicted that would give lenders “sufficient time to adjust to the changes while minimising any potential adverse impact”.

The new rules, which were proposed by the US Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, would apply to banks with more than $100bn in assets and mark regulators’ most comprehensive effort in more than a decade to fortify the financial system.

In general, the new rules would set an industry standard for measuring the risk of lending and other activities — something banks have previously been allowed to do for themselves. The uniform standards are more conservative than how individual banks have typically measured their risk, in effect forcing them to hold more capital in case of losses.

“The proposal would improve the resilience of the US banking system by modifying capital requirements for large banking organisations to better reflect their risks and apply more transparent and consistent requirements,” the regulators said on Thursday.

The plans would spare smaller institutions such as community banks, but capture larger regional lenders that previously were not subject to more stringent requirements on capital, which is used to absorb losses.

The regulators say the new rules will make banks less prone to the types of financial distress that hit in 2008 and, to some degree, the recent turmoil this spring, which resulted in three of the four largest failures of federally insured banks in US history. The regulatory overhaul also aims to bring the US into compliance with international standards — the so-called Basel III endgame reforms — stricter rules that most jurisdictions globally have already implemented.

Agency officials said on average capital requirements for the so-called global systemically important banks (G-Sibs) were estimated to rise 19 per cent. However, several bank industry groups pushed back against the regulators projections, saying the rules would force them to set aside more capital than regulators suggest.

The Bank Policy Institute estimated that the new rules could require the nation’s largest banks to increase their capital by as much as 24 per cent.

The board of governors at the Fed also gathered on Thursday to discuss the proposals, with chair Jay Powell affirming in his opening remarks his support of the changes but acknowledging that a “balance” needed to be struck between safeguarding the banking system and the costs associated with demanding higher capital requirements.

Not all officials appear to be on board, however. Michelle Bowman, a governor, warned of “harmful, unintended consequences”, including reduced competition and curtailed lending.

“These increases will have a tangible effect on banking activities and may have a detrimental impact on US market liquidity and lending,” she said.

Christopher Waller, another governor, also issued a rebuke of the changes, saying he was “concerned” the proposals would “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 the largest US banks, said the new rules would hurt the US’s ability to compete with other economies, making a variety of loans and other financial services more costly or less available than in Europe or elsewhere. “Regulators and other policymakers should carefully consider the harmful economic impact of this proposal,” the group’s leader Kevin Fromer said in a statement.

The rules are subject to a public comment period that ends November 30, and are due to be finalised next year.

As part of the proposed changes, all banks with more than $100bn in assets would have to factor in a larger portion of their market losses, even if they still only exist on paper, into their capital ratios. Silicon Valley Bank failed after accumulating a large amount of so-called unrealised losses on its bond portfolio. The regulations would also require banks to increase the amount of capital they have to hold when regulators determine the economy is headed for a recession, or some other type of stress.

Banks would have to hold capital against so-called operational risk. That could hit banks with large asset management arms, or other divisions not directly tied to lending and trading, that in the past have not been factored into the bank’s capital requirements. Shares of American Express, which derives some of its income from payment processing fees, fell almost 1 per cent on Thursday.