US banks are pushing to soften a major regulatory proposal to hike bank capital requirements, worried it could prove too onerous, especially for lenders still reeling from the March banking crisis, according to six people briefed on the matter.

Bank regulators led by the US Federal Reserve are finalising the proposal, which would implement international capital standards agreed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis.

Bankers are particularly concerned by an aspect of the draft proposal that would apply higher capital charges on non-interest revenue, such as the fees lenders charge on credit cards or investment banking services.

That capital charge is part of the package agreed by the Basel Committee in 2017, but the industry says it overstates the risk for banks that have a high proportion of non-interest income and had hoped US regulators would mitigate its impact, the people said.

Bank groups are pushing for regulators to cap the proportion of assets on which such charges would apply, said three people, but it was unclear if the agencies would take that approach.

Non-interest services income has been a key focus of many lenders’ growth strategies in recent years, one industry official noted.

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American Express, Morgan Stanley and the US units of UBS, Deutsche Bank and Barclays are among banks with a high proportion of non-interest income, according to a 2022 blog by Washington group the Bank Policy Institute.

Barclays, Deutsche Bank, and Morgan Stanley declined to comment. UBS and American Express did not immediately provide comment.

On Wednesday, Fed Chair Jerome Powell told Congress it was critical banks have strong capital, but regulators must be mindful of the tradeoffs.

While the Basel rules were agreed years ago, the US regulations to comply with them are being drafted in the wake of this year’s banking crisis, in which deposit runs caused Silicon Valley Bank and two other lenders to fail. The proposal is the first major rule led by Fed Vice Chair for Supervision Michael Barr, who has launched a sweeping review of capital rules and is expected to be tough on Wall Street.

“The baseline has shifted to an assumption that the scale and scope of the proposal is going to be far more punitive than anyone expected at the end of last year,” said Isaac Boltansky, director of policy research for brokerage BTIG.

Industry executives argue the bank failures were caused by mismanagement and liquidity issues, and that system-wide capital is already ample.

The proposal is also expected to apply stiffer capital rules to smaller lenders with over US$100 billion in assets, which would include some that experienced liquidity problems this year, three sources said.

Given investor jitters over the health of the industry and the broader economy, bankers say, hiking capital now could backfire, putting pressure on banks and hurting lending.

Republican officials at the agencies have flagged similar concerns, two people said, while Republican lawmakers on Wednesday also raised worries over capital rules with Powell.

“It’s extremely important for the agencies to be mindful of the economic costs at a time of great uncertainty,” said Kevin Fromer, CEO of the Financial Services Forum whose members, the country’s largest eight banks, have roughly US$900 billion in common equity capital.

“It’s not in the interest of the US economy to raise capital requirements on institutions that are already well-capitalised.”

The Fed is drafting the Basel rules with the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp (FDIC). Regulators had hoped to unveil the proposal this month, but staff are still working on the draft and the timeline has slipped to later in July, five people said.

The FDIC and OCC declined to comment.

Speaking to reporters last week, acting Comptroller Michael Hsu said banks had “not been shy about sharing their concerns” which regulators were taking into account. REUTERS