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The biggest US banks’ capital requirements will be cut by 4.8 per cent under proposals by regulators in one of the most aggressive moves to loosen restrictions imposed on Wall Street lenders after the 2008 financial crisis.
The move, which would weaken one of the main regulatory guardrails against another financial crisis, has been broadly welcomed by the banking industry, with analysts predicting it will lead to an increase in share buy-backs, more lending and greater consolidation in the sector.
On Thursday, the US Federal Reserve presented plans to adopt the Basel III rules agreed by global regulators, reform the rules on how banks assess risk and change a key capital buffer imposed on the biggest banks. It said that, together, the measures would cut capital requirements for the biggest US banks by 2.4 per cent.
Once the impact of earlier reforms to the Fed’s banking stress tests is included, there would be a 4.8 per cent reduction in capital required at the biggest US lenders with more than $700bn of assets such as JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
The Fed said that midsized banks with between $100bn and $750bn of assets would benefit more from the reforms, with their capital requirements falling 5.2 per cent.
Smaller lenders with less than $100bn of assets would be the biggest beneficiaries, it said, with their capital requirements dropping 7.8 per cent.
The Fed’s proposals, which are subject to a 90-day consultation, represent a victory for Wall Street lobbyists. In 2023, the Fed had announced plans to implement the so-called Basel Endgame reforms in a way that would have resulted in a 19 per cent increase in the capital requirements of big US banks.
The latest plans, which have been welcomed by US lenders, are likely to intensify calls from banks in other markets for their regulators to ease their rules in response. The Bank of England and the EU have delayed part of their Basel reforms to see how Washington would apply them.
Jason Goldberg, a bank analyst at Barclays in New York, said in a note earlier this week: “Finalising capital reforms should provide banks with greater certainty for capital planning and management and enable them to better perform their intermediation and financing roles.”
The changes should also “improve a bank’s ability to lend” as well as lead to “increased share repurchase and help facilitate bank M&A”, Goldberg said.