Big US banks face 20% jump in capital requirements, WSJ says

LARGE US banks may face a 20 per cent average increase in capital requirements from upcoming rule proposals as the collapse of several smaller lenders this year adds urgency to a push to bolster the industry’s financial strength, according to the Wall Street Journal. 

The revised requirements could be proposed as early as June, and the specific increases will depend on lenders’ activities, according to the report, citing people the newspaper didn’t identify. Institutions with large trading businesses would take the biggest hit while those heavily dependent on fee income could also face significant increases, the report said. 

Banking regulators around the world are tightening capital rules for the industry as they seek to wrap up the final chapter of their response to the financial crisis of 2008. As memories of the credit crunch fade, politicians have occasionally sought to loosen standards, yet the collapse of several banks in the US earlier this year served as a reminder of the fallout from weak lenders.

The industry and its investors have been bracing for increases for months and have been eagerly awaiting details of the overhaul. JPMorgan chief financial officer Jeremy Barnum said late last month that the firm was expecting the proposals on implementing new Basel standards “any day now.” He said that while the firm would push back on calls for more capital, it was preparing for its requirements to rise. 

Citigroup chief executive officer Jane Fraser said last week that her bank was holding off on anything beyond modest buybacks until it had more clarity on the Basel changes and the Federal Reserve’s separate “holistic” review of capital requirements.

Michael Barr, the Fed’s vice chair for supervision, has previously said that US officials are reviewing bank capital requirements and committed to putting in place strictures that align with Basel III. Barr, who took over as the Fed’s top bank watchdog in July 2022 and an architect of the Dodd-Frank Act of 2010, has also signalled that he supports tougher restrictions on bigger, systemically important lenders than smaller institutions. 

The biggest US banks are already subject to higher requirements than their top European peers, according to the European Central Bank, which oversees lenders in the euro area. Despite that disadvantage, US securities firms were able to win market share from European competitors in previous years.

Yet the recent US bank failures were firms with smaller balance sheets than such global systemically important lenders.

Banks with at least US$100 billion in assets may have to adhere to new requirements, lower than the existing US$250 billion threshold, for which regulators have reserved their most stringent rules, according to the Journal. The Trump administration had loosened rules for many regional banks.

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While Europe applies Basel standards to all banks, the US differentiates more on which rules it applies to large and small banks. Excluding mega banks, euro area lenders would face lower requirements if they were based in the US, according to the ECB.

Other jurisdictions are also working on their own implementation of the final Basel III standards. The European Union is trying to water down its version after the industry warned that a strict approach would risk choking off the supply of credit to the bloc’s economies.

In the US, the Fed is playing a leading role in crafting the measure, along with the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency, according to the WSJ. All three agencies are expected to seek comment on the proposed capital rules before voting to complete changes and eventually implementing them over the coming years, the report said.

JPMorgan CEO Jamie Dimon was among critics blasting on more cumbersome capital requirements, calling the upcoming increase “bad for America” last year ahead of a pair of congressional hearing. The bank said at its investor day that while the final pieces of Basel III capital rules – which some investors have referred to as Basel IV because they could be so extensive – may be proposed soon, they’re unlikely to be implemented before early 2025. BLOOMBERG