US banking industry starts to pick its battles against new capital rules

 The US banking sector is starting to fight back against new capital rules

(Reuters) - Now that regulators in Washington have rolled out a sweeping package of capital regulation reforms in the wake of the financial crisis, banking industry advisers are honing in on what they see as the most disruptive, including risk management requirements that could affect real estate lending, consumer credit and wealth management.

In a joint proposal on July 27, the three top U.S. banking regulators proposed a 1,000-page overhaul that would, in aggregate, require banks to set aside an additional 16% of the capital that regulators say is needed to shore up the financial system.

By increasing the amount of risk attributed to certain assets, the proposed rules would require banks to hold proportionately more capital, which could reduce returns on equity and profits. Industry lobby groups such as the Financial Services Forum (FSF), the Bank Policy Institute and the Securities and Financial Markets Industry Association have argued it will make it harder to lend to consumers and warn it will slow the economy.

Although three of the four largest bankruptcies in US history occurred in the spring of 2023, the FSF responded to the proposal by saying that the Federal Reserve's own stress tests showed that the largest banks were healthy and well capitalized, making the proposal a "no-brainer." ."

Industry analysts see areas that the well-funded banking lobby will want to red-pen.

Joe Sass, senior vice president of balance sheet risk at financial services conglomerate FIS, said the proposal's move from a standard risk charge to a range of risk levels to be assigned to different assets for lease-backed property lending would likely be "circled in favor". pushing."Making such loans more expensive will reduce the credit available to historically underserved borrowers, something the industry is likely to fight, he said.

Chen Xu, a lawyer in the financial institutions group at Debevoise & Plimpton, said the new rules treat high-income business lines as higher risk."Some businesses that are fee-based, such as wealth management, will have to allocate more capital even though there is no balance sheet risk," he said, adding that this could weigh on capital markets trading.

Fed officials did not comment on this article. But Fed Vice Chairman for Supervision Michael Barr said in announcing the proposal that "extensive analysis" suggests that the benefits of a strong financial system "outweigh the costs to economic activity" that can come with holding more capital.The big banks commented only sparingly on the proposal. JPMorgan Chase CEO Jamie Dimon told CNBC on Wednesday that it was "hugely disappointing," arguing that it was poorly designed and would limit access to credit for consumers and small businesses.

Wells Fargo said it had no comment beyond an Aug. 1 regulatory filing in which it said the proposals would likely change its risk metrics for lending and result in a net increase in its capital requirements.A representative for Citigroup declined to comment. Bank of America did not respond to a request for comment.According to Kevin Stein, senior adviser at financial services advisory firm Klaros Group, the new risk-weighting standards could get more business to non-bank lenders out of the reach of regulators.

The banking lobby had plenty of time to prepare for this battle, as the July proposal was six years in the making. It aims to implement the final set of post-financial crisis reforms, often known as the Basel III "Endgame", agreed in 2017 by the Basel Committee on Banking Supervision, which is made up of regulators from major economies.

Analysts at Morgan Stanley say it could take up to four years for the biggest banks to set aside profits to comply with new capital rules. However, Richard Ramsden, a Goldman Sachs analyst who covers big banks, said the biggest lenders were facing an unexpectedly tough upswing.The increase in risk-weighted assets translates into about $135 billion in incremental capital requirements for the largest banks, which is about 200 basis points of Common Equity Tier 1 capital for the largest banks, Ramsden said.

"The banks are basically going to have to make decisions now. What are they going to do with buybacks? What are they going to do in terms of managing their balance sheets?" he asked.Dennis Kelleher, head of the financial reform group Better Markets, said the banking industry had made similar complaints in the past, which he said had turned out to be unfounded.

"Wall Street is an expert at hiding its special interests behind the concerns of others, stoking them with scare tactics and false claims," ​​he said."What they don't talk about is the threat to the economy and lending and the high street and families and the contagion from undercapitalized banks."

The US banking sector is experiencing a pivotal moment as it grapples with the implementation of new capital rules. These regulations were introduced with the general goal of increasing financial stability and minimizing the risk of another financial crisis. As the industry adapts to these changes, banks are choosing their battles strategically, finding a balance between compliance and continued growth. In this article, we examine the implications of the new capital rules on the US banking sector and how key players are using innovative strategies to remain competitive and resilient.

Understanding the New Equity Rules:

In response to the lessons of the 2008 financial crisis, regulators introduced new capital rules to protect the financial system and protect consumers. These rules require banks to maintain higher capital buffers and ensure that they have sufficient reserves to withstand a potential economic downturn. By complying with these regulations, banks can create a more robust and secure financial environment for the nation.

Impact on US banks:

The new capital rules had a significant impact on the US banking sector. Large, systemically important banks, known as "too big to fail," faced the greatest challenges in meeting higher capital requirements. Smaller regional and community banks also felt the effects, albeit to a lesser extent. Adherence to these rules required a fundamental change in the way banks operate, resource allocation and risk management.

Strategies adopted by banks:

Optimizing capital allocation: To meet the new capital requirements, banks are strategically reallocating their capital across different business lines. By prioritizing profitable and less risky businesses, they can effectively balance compliance and growth.

Fostering innovation: Amid the challenges posed by the new rules, banks are leveraging technological advances to increase efficiency and reduce operating costs. This approach not only helps them maintain regulatory compliance, but also ensures they remain competitive in the digital age.

Streamlining operations: Simplifying organizational structures and processes has become an essential strategy for banks. By eliminating redundancies and optimizing workflows, banks can free up capital while maintaining stability.

Diversification of income streams: Banks are exploring new income streams beyond traditional lending and investing. Expansion into wealth management, fintech partnerships and other non-traditional areas helps mitigate the impact of stricter capital requirements on core banking activities.

Cooperation with regulatory authorities: In order to create a more favorable regulatory environment, banks actively cooperate with regulatory authorities. By actively participating in discussions and providing valuable insights, they seek to shape the rules that strike a balance between stability and growth.

The US banking sector faces a defining moment as it navigates new capital rules. These regulations, while onerous, are necessary to promote financial stability and protect consumers. By choosing battles wisely, optimizing capital allocation, fostering innovation, streamlining operations, diversifying revenue streams and working with regulators, banks can become stronger and more resilient. As the industry adapts to these changes, the US banking sector is poised to embrace the future with confidence, fueling economic growth while ensuring the safety and security of the financial system.