U.S. regulators are ready to propose a rule that could majorly increase capital needs for larger banks, pressuring them to cut prices and retain earnings in an effort to absorb possible losses that could adversely impact consumers and investors.
The proposal, to be revealed later on Thursday and voted on by the Federal Deposit Insurance Corporation and the Federal Reserve, represents the first in a long effort to tighten bank oversight, specifically in the wake of the spring turmoil that witnessed three major financial companies collapse.
The rule, which would implement a 2017 agreement by regulators worldwide, targets overhauling how banks estimate their riskiness and, in turn, how much cash they must keep with them.
Industry opponents have already started to criticize the plan as banks try to soften, delay, or otherwise divert the government’s long-planned endeavor. They argue that the price hikes are unfair and financially detrimental.
“The banking industry probably didn’t influence the upcoming proposal as much as it wanted. But it’s determined to fight on what it sees as major issues in the months between Thursday and whenever a final rule is approved,” managing director at Washington-based Capital Alpha Partners, Ian Katz, stated in a research note.
Top officials at banks such as JPMorgan Chase and Morgan Stanley have cautioned that stricter rules could coerce them to pull back on services or raise fees. Analysts say it could take years of retained income to comply, narrowing their ability to raise dividends or buy back shares.
In what is considered a lengthy and technical proposal, bank investors wish to improve the way companies calculate their risk in lending, trading, and internal operations. The proposal calls for U.S. regulators to use the Basel Committee on Banking Supervision to carry out an earlier international agreement.
Fed Vice Chair for Supervision Michael Barr, who is heading the endeavor, stated he will also seek stricter rules for firms with more than $100 billion in assets, which could involve banks like Huntington, Fifth Third, Citizens Financial Group, and Regions.
Barr, a Democrat appointed by President Joe Biden, has argued that banks need bigger reserves to protect against unforeseen risks, like when several banks collapsed earlier this year under the weight of sizable unrealized losses as interest rates rose, necessitating the intervention of government regulators to protect depositors.
“Bank capital is critical,” said president and CEO of Better Markets (which advocates for tougher financial rules), Dennis Kelleher. “However, maximizing Wall Street’s bonuses depends on minimizing capital and that’s why Wall Street fights to prevent regulators from requiring them to have enough capital.”