Wall Street Banks Clash Over Fed’s Capital Rule Overhaul
Synopsis
Wall Street’s biggest banks turn on each other as a Fed capital rule tweak threatens to favor some lenders over others.
Key Highlights
• JPMorgan, BofA, and other Wall Street giants are divided over proposed changes to bank capital rules.
• The Federal Reserve’s plan would loosen capital requirements overall, but the benefits would vary from bank to bank.
• JPMorgan estimates it could give up $13 billion in capital relief, while BofA could lose around $9 billion.
• Goldman Sachs and Morgan Stanley could each gain an additional $1 billion to $2 billion if the proposal is approved.
• The Fed aims to have the new rules in place by the end of the year.
Big Banks Split Over Capital Rule Changes
For years, Wall Street’s biggest banks have worked together to push for more relaxed capital requirements. Now that the Fed is close to finalising its changes, however, the banks are divided over the details.
JP Morgan, Bank of America, Goldman Sachs, and Morgan Stanley disagree over the proposal, which involves the capital surcharges applied to the largest American banks. In March, the Fed proposed changing the way it measures short-term wholesale funding, including a repo loan and commercial paper. Regulators argue that this type of funding can disappear rapidly during a financial crisis and should therefore be treated differently.
Winners and Losers
The proposed change would benefit some banks more than others. JP Morgan and Bank of America rely heavily on customer deposits, while Goldman Sachs and Morgan Stanley make greater use of short-term wholesale funding.
A letter was sent to the Fed, in which JP Morgan estimated that it could cost $13 billion in capital relief. Bank of America put its potential loss at around $9 billion. Goldman Sachs and Morgan Stanley, meanwhile, could each receive an additional $1 billion to $2 billion in relief.
The difference has prompted JPMorgan and Bank of America to urge the Fed to scrap the change. They argue that it could make business lending more difficult and encourage banks to take on greater trading risks. Goldman Sachs and Morgan Stanley support the proposal, saying it offers a more accurate way to measure risk.
Fed Under Pressure to Finish the Rule
It remains unclear which side will ultimately prevail. Fed Vice Chair for Supervision Michelle Bowman has encouraged banks to limit additional feedback and is expected to remain close to the current proposal, partly because she wants the rule completed by year-end.
The dispute is also unfolding at a politically sensitive time, with Democrats expected to gain control of the House of Representatives next year and potentially increase scrutiny of the Fed’s regulatory decisions.
Background on the Rule
The Fed introduced the capital surcharge after the 2007–2009 financial crisis to ensure the biggest banks maintain enough capital to withstand a severe financial shock. Short-term wholesale funding has long been included in that calculation.
Large banks have criticised the rule for years, arguing that it is too strict and does not accurately reflect the risks they face. Following strong industry pressure, the Fed agreed to review the rule in 2022. The current proposal is the result of that review.
Source: Reuters
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