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US Banking Starts to Pick its Battles against New Capital Rules

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

Though the spring of 2023 saw three of the four biggest bank failures in U.S. history, the FSF reacted to the proposal by saying the Federal Reserve’s own stress tests show the largest banks were sound and well capitalized, making the proposal “a solution without a problem.

Chen Xu, an attorney in the financial institutions group at Debevoise & Plimpton, said the new rules viewed high-revenue business lines as higher risk.

“Some businesses that are fee-based such as wealth management will need to allocate more capital even if there is no balance sheet risk,” he said, adding that this could weigh on trading in capital markets.

Reform proponents argue the true danger to public welfare is financial instability.

Major banks have commented only sparingly on the proposal. JPMorgan Chase JPM.N CEO Jamie Dimon told CNBC on Wednesday that it was “hugely disappointing,” claiming it was poorly designed and would shrink access to credit for consumers and small businesses.

According to Kevin Stein, a senior adviser at the financial services advisory firm Klaros Group, the new risk-weight norms could drive more business to non-bank lenders beyond the reach of regulators.

The bank lobby has had plenty of time to gear up for this battle as the July proposal was six years in the making. It is intended to implement a final set of post-financial crisis reforms, often known as Basel III “Endgame” agreed to in 2017 by the Basel Committee on Banking Supervision, which comprises regulators from major economies.

Morgan Stanley MS.N analysts say the largest banks may take up to four years to set aside profits to comply with the new capital rules. However, Richard Ramsden, a Goldman Sachs GS.N analyst covering large banks, said the biggest lenders face an unexpectedly onerous climb.

“The banks will have to make decisions pretty much now. What are they going to do with buy-backs? What are they going to do in terms balance sheet management?” he asked.

Dennis Kelleher, head of the financial reform advocacy group Better Markets, said the banking industry had made similar complaints in the past which he believed had proven unfounded.

“Wall Street is expert at hiding their special interests behind the concerns of others, which they inflame with scare tactics and false claims,” he said.

“What they don’t talk about is the threat to the economy and lending and main street and families and contagion from under-capitalized banks.”

REUTERS

 

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