US banks eye capital victory as regulators tee up new Basel draft

By Pete Schroeder

WASHINGTON, March 10 (Reuters) – U.S. President Donald Trump’s bank regulators will unveil in coming weeks long-awaited draft rules that could ultimately shrink the amount of cash lenders must set aside to absorb losses, in a major potential victory for the industry that could unleash billions of dollars in excess capital.

The Federal Reserve and fellow agencies are expected this month to unveil a more industry-friendly draft of the “Basel” rule overhauling how lenders gauge risk, three industry executives said. The agencies also plan to release a related proposal easing an extra capital surcharge levied on the riskiest global systemically important banks, or GSIBs, they said. 

Fed Vice Chair for Supervision Michelle Bowman, who is leading the effort, is scheduled to give a speech on Basel on Thursday.

The overhaul marks the culmination of a years-long effort by Wall Street banks to ease rules introduced following the 2007-09 financial crisis which they and the regulators say are stymieing economic growth. 

“I share the broad expectation that it will be quite friendly to banks. There has been talk from the regulators for a long time that it would be roughly capital neutral. It’s possible that it will be a bit better than that for some banks,” said Ian Katz, managing director at Capital Alpha Partners.

A Morgan Stanley research note published this week said large banks currently have over $175 billion in excess capital, and clarity on the rules could allow them begin deploying that cash via lending and share buybacks.

INDUSTRY-FRIENDLY DRAFT

The Basel draft will change how capital is distributed, meaning overall capital levels are expected to remain unchanged for most banks, with Wall Street trading giants experiencing a small bump, Reuters reported in October. However, those rises could be mostly offset by adjustments to the GSIB surcharge.

At an industry conference on Monday, Fed General Counsel Mark Van Der Weide said regulators were aiming for a proposal that will not cause major industry disruption.

The regulators are also easing a related leverage ratio, while the Fed is adjusting its annual bank health checks, which set some capital levels, by making the models more transparent.

All told, capital is expected to remain flat or fall slightly for most big banks, said the sources and analysts. 

That expected outcome marks a dramatic turnaround for the industry, which faced a 19% increase when the proposal was first unveiled by Bowman’s Democratic predecessor Michael Barr, sparking an unprecedented industry pushback. 

Speaking at the same Monday conference, Douglas Elliott, a partner at consultancy Oliver Wyman focused on bank rules, said that U.S. GSIB capital could fall as much as 10% in coming years, depending on how other details shake out. The U.S. changes have sparked a global deregulatory race as other countries worry their banks could be put at a disadvantage.

“That’s a significant shift in competitiveness toward U.S. banks and frankly they’ve already been winning,” he added.

Bowman has said she wants to unveil the proposal by the end of March, and regulators have already submitted a plan to the administration for review.

Both rules, which are complex and lengthy, will be subject to industry feedback, and it is unclear when they may ultimately be finalized. The midterm elections could potentially complicate the process if Democrats, who generally oppose looser rules, gain more seats in Congress and could use their increased power to fight the changes, said the people. 

Jonathan Gould, Comptroller of the Currency, said Tuesday regulators are hoping to move as quickly as possible, noting that banks have made it “loud and clear” that they want the rules completed.

Spokespeople for the Fed, FDIC and OCC declined to comment.

(Reporting by Pete Schroeder; editing by Michelle Price and Nick Zieminski)