Fed's Barr unveils sweeping bank capital plan revisions after pushback, delays

By Pete Schroeder

WASHINGTON (Reuters) -The Federal Reserve's regulatory chief on Tuesday outlined a sweeping overhaul easing two major draft bank capital rules following intense industry opposition that delayed the projects and sparked divisions among the top federal banking regulators.

In a speech to an audience at the Brookings Institution, Fed Vice Chair for Supervision Michael Barr said regulators will reissue watered-down drafts of the Basel Endgame rule and a separate capital rule for big risky banks, in a major win for Wall Street banks which have aggressively lobbied to weaken them.

The draft Basel rule, first unveiled in July 2023, overhauls how banks with more than $100 billion in assets calculate the amount of capital they must put aside to absorb potential losses. The other draft rule for global systemically important banks (GSIBs) had aimed to make capital levels for those lenders more risk-sensitive.

Overall, the plans had together envisaged hiking capital by around 19% for the biggest U.S. lenders, but that figure will now fall to 9%, Barr said. Banks with under $250 billion in assets, meanwhile, will be almost entirely exempt from Basel, he added.

"There are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received," he told the Washington-based think tank.

Regulators say the rules will make the banking system safer, especially after three big lenders failed last year.

In public campaigns and conversations with lawmakers in Washington, Wall Street banks have argued more capital is unnecessary and will hurt the economy. They have threatened to sue to kill the final rule on grounds the U.S. central bank and other agencies did not follow the proper procedure.

Bowing to that pressure, Fed Chair Jerome Powell has said regulators will make "broad and material" changes and that the new draft should be re-proposed for public feedback. But Fed officials have been at loggerheads with their counterparts at the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) who have wanted to finalize the rule before the election, Reuters reported in June.

Barr's speech indicates the agencies have agreed to a path forward. A key question, though, is whether Barr's plan will do enough to satisfy Wall Street banks and stave off litigation.

"Our view is that the big banks may support the revised proposal if it is moderated as expected, as it would provide certainty on capital, which we view as positive for the sector," Jaret Seiberg, an analyst with TD Cowen, wrote in a note.

The Fed is likely to propose the new draft this month, Bloomberg reported on Friday, although Barr did not offer guidance on timing. The central bank is also expected to simultaneously publish its analysis of the impact of the rule.

The prolonged fight means Basel will not be finalized before the Nov. 5 presidential election and could be weakened further or shelved if Republican candidate Donald Trump, who has pledged to ease burdensome rules, wins back the White House.

(Reporting by Pete Schroeder in Washington; Editing by Michelle Price, Matthew Lewis and Paul Simao)