Big banks just got a big win

Federal regulators put forward three proposals Thursday that would reduce capital requirements for U.S. banks of all sizes and advance U.S. implementation of the Basel III international accord.

The Federal Reserve, the Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency developed the proposals. The Fed's Board of Governors approved them in a 6-1 vote. The public can submit comments until June 18.

The first proposal would apply to the largest and most internationally active banks, replacing two sets of compliance calculations with one and adjusting how credit, market, and operational risks are measured. A second proposal would better align capital requirements for midsize and smaller banks with the risks of traditional lending and would require more large banks to reflect unrealized gains and losses on certain securities in their capital ratios — a change the Fed said draws on lessons from the 2023 regional bank stress. A third proposal, from the Fed Board alone, would tie the capital surcharge for the largest and most complex banks to nominal GDP growth, according to Bloomberg. Fed Chair Jerome Powell said the move would let those institutions expand their balance sheets without triggering higher systemic surcharges.

A Fed memo projects that the largest banks' capital requirements would fall 4.8% in aggregate once the proposals are considered alongside stress-test revisions the Trump administration put in place separately. The memo put the comparable figure at 5.2% for midsize banks and 7.8% for smaller institutions. Taken on their own, without the earlier stress-test changes, the new proposals would reduce the largest banks' required capital by about 2.4%, or roughly $20 billion, according to The Wall Street Journal

The changes would reverse a Biden-era Basel proposal that major banks resisted and that was never finalized. The Biden administration's earlier iterations of Basel rules had called for capital hikes of up to 20% at the biggest institutions — a figure that was later revised down to 9% — before being abandoned, The Journal reported.

The Fed said overall capital in the banking system would decrease modestly but remain substantially above pre-financial-crisis levels.

Fed Vice Chair for Supervision Michelle Bowman, appointed by President Donald Trump, said the changes would reduce incentives for mortgage origination, mortgage servicing, and business lending to migrate outside the regulated banking sector. The sole vote against the proposals came from Fed Governor Michael Barr, the Biden administration's vice chair for supervision, who had pushed for the stricter capital rules the new package replaces. "I fear that, if this much weaker version of Basel III is adopted in the U.S., it could trigger a race to the bottom on standards, harming the global financial system," Barr said.