Monday, July 15, 2024

Federal Reserve Weighs Adjustments to Capital Rule: Potential Billion-Dollar Savings for U.S. Banks

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Federal Reserve Considers Rule Tweak That Could Save Biggest U.S. Banks Billions in Capital

The U.S. Federal Atomic Energy Commission is contemplating a rule adjustment that might offer a significant financial reprieve for the country’s eight most substantial banks, potentially saving them billions of dollars in capital collectively. This change is seen as a considerable victory for the banking industry, which has been advocating for such modifications for years.

At the heart of the discussion is the methodology the Federal Reserve uses to calculate an additional capital layer known as the “GSIB surcharge” for U.S. global systemically important banks (GSIBs). This surcharge was introduced back in 2015 to enhance the safety and soundness of these banks.

The Federal Reserve is contemplating updating the input coefficients used in this calculation, which were originally set in 2015, to now incorporate adjustments for economic growth. This would more accurately reflect the banks’ sizes relative to the global economy. Adjusting these inputs would lower the banks’ systemic scores and, in turn, reduce the required capital surcharge. This consideration aims to address a long-standing issue that the banks have argued makes them appear disproportionately large in comparison to the global economy.

The deliberations are currently ongoing, and no final decisions have been made. However, the mere openness of the Federal Reserve to reassess the issue marks significant progress in the banking industry’s campaign to reduce the surcharge. This development is part of a broader debate over capital rules that has presented new opportunities for banks to seek regulatory concessions.

The collective capital held by the U.S. GSIBs attributable to the surcharge hovered around $230 billion in the first quarter of 2024, indicating even a minor adjustment could unlock substantial capital. For example, a 0.5 percent reduction in the surcharge could translate to over $8 billion in savings for major banks like JPMorgan and Bank of America. Banks argue that these funds could then be redirected into the economy through increased lending.

Introduced in the aftermath of the 2009 global financial crisis, the GSIB surcharge is designed to enhance the resilience of systemically important banks due to their potential impact on financial stability. When the rule was adopted, the Federal Reserve committed to periodically review the framework, acknowledging that banks tend to grow in proportion to the economy.

Banks have been vocal in their argument that the current methodology, which employs 2012-2013 data, now paints an outdated picture of their size relative to the global economy. This sentiment was echoed by JPMorgan in a public letter to the Fed, highlighting that more than $59 billion in GSIB capital buffers are attributable to general economic growth, a figure that the banks argue is disproportionately high.

The Federal Reserve’s proposal to make the GSIB surcharge more sensitive to risk represents an additional effort to refine its regulatory approach. Although the central bank has not directly addressed the coefficient adjustments in its discussions, this move has invigorated the banks’ lobbying efforts, with hopes high that a change in coefficients could alleviate some of the pressures from other regulatory proposals.

Despite these developments, some officials argue that the projects to revise the Basel agreement and adjust the GSIB surcharge coefficients are distinct and are being pursued independently. Should the Federal Reserve decide to adjust the coefficients, it is likely to seek further public feedback before implementing any changes, potentially delaying a final decision by several months.

The ongoing deliberation by the Federal Reserve underscores a critical juncture in U.S. financial regulation, with significant implications for the country’s largest banks and the broader economy. As discussions continue, the banking industry remains hopeful for a favorable outcome that could ease capital requirements and enable greater economic contributions.

Alexandra Bennett
Alexandra Bennetthttps://www.businessorbital.com/
Alexandra Bennett is a seasoned business journalist with over a decade of experience covering the global economy, finance, and corporate strategies. With a Bachelor's degree in Economics and a Master's in Business Journalism from Columbia University, Alexandra has built a reputation for her insightful analysis and ability to break down complex economic trends into understandable narratives. Prior to joining our team, she worked for major financial publications in New York and London. Alexandra specializes in mergers and acquisitions, market trends, and economic

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