US Regulators Poised to Ease Basel Capital Requirements

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U.S. regulators are anticipated to substantially lessen the additional capital banks are mandated to retain under a proposed rule, which has faced staunch opposition from Wall Street, according to eight industry insiders familiar with ongoing discussions with regulatory officials.
The proposal, known as “Basel III,” was introduced by bank regulators led by the Federal Reserve in July to revamp how banks with over $100 billion in assets determine the cash reserves required to absorb potential losses.
Initially, the agencies projected a roughly 16% increase in aggregate capital for the approximately three dozen affected lenders. However, insiders suggest that figure is likely to decrease significantly as regulators undertake a comprehensive revision of the draft.
Though discussions are preliminary, the focus is on recalculating potential losses from operational risks, particularly associated with fee income from lending services like investment banking, which represents a significant expense for banks.
Officials are also considering eliminating or reducing higher risk weights on mortgages for low-income borrowers and renewable energy tax credits.
Fed Vice Chair for Supervision Michael Barr has initiated the revision process, collaborating with Fed Chair Jerome Powell. Powell has signaled a desire for “significant” changes during his recent testimonies before Congress.
While adjustments are under consideration, including to mortgage weights and operational risk calculations, specifics of the capital reduction and other regulatory discussions have not been previously disclosed.
Wall Street’s vigorous opposition to the proposal has led to an intense lobbying effort, unprecedented in the past 25 years, according to industry observers.
Regulators have yet to determine whether to re-propose the rule, a move that could delay its finalization and potentially extend it into a new presidential administration.
The proposal, aligned with international standards established by the Basel Committee on Banking Supervision post-global financial crisis, has faced criticism from banks, who argue it exceeds the Basel accord and exaggerates their risks.
Regulators are also contending with dissent among the Fed’s board members. Governors Michelle Bowman and Christopher Waller voted against the proposal, expressing concerns about its impact on borrowers. Vice Chair Philip Jefferson and Powell himself have also voiced skepticism.
The Fed, committed to achieving broad consensus on the rule within its board, has engaged in numerous meetings and discussions with industry leaders, including CEOs of major banks.
Another challenge lies in reaching an agreement with the FDIC, chaired by Wall Street critic Martin Gruenberg, who did not respond to requests for comment.
Despite ambitions to finalize the rule by summer, regulatory officials acknowledge that the timeline may be overly ambitious.