Fed's Barr unveils sweeping bank capital plan changes 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 the Brookings Institution, Fed Vice Chair for Supervision Michael Barr said regulators will reissue watered-down drafts of the so-called "Basel Endgame" rule and a separate capital rule for global banks, in a major win for Wall Street lenders 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) aims to make capital levels for those lenders more risk-sensitive. Reuters first reported in July that the Fed was considering tweaking that rule to give banks including JPMorgan Chase, Bank of America <BAC.N, and Citigroup a capital break.

Overall, the plans had together envisaged hiking capital by around 19% for the biggest U.S. lenders, but following a major re-write of the draft that figure will now fall to 9%, Barr said. Banks with under $250 billion in assets, meanwhile, will be mostly exempt from Basel, he added, good news for KeyBank, M&T, Huntington, and Fifth Third among others.

Those lenders would only have to account for unrealized gains and losses on securities in their portfolio, an issue which sparked turmoil in the U.S. banking sector last year. Overall, their capital increase would be roughly 3% to 4%, Barr said.

The changes, which will be subject to more public feedback, are likely to spark another round of industry lobbying which could ultimately result in the rules being further weakened.

"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," Barr told the audience of academics, industry officials and reporters.

The S&P 500 banking index was down 3.6% to near a one-month low in mid-morning trading, with shares of JPMorgan & Chase, Morgan Stanley and Citigroup down between 2.8% and 6%.

The sharp drop in bank shares suggested investors had been hoping for a bigger capital hike reduction, and bankers and analysts said much will depend on the details of the new draft.

"Obviously 10 is better than 20. So that's good. The issue is we have no idea what they have changed," JPMorgan Chase president Daniel Pinto said at the Barclays Investor conference on Tuesday, adding the bank would be closely examining changes to how the draft weighs markets risks.

LITIGATION THREAT

Regulators say the rules will make the banking system safer, especially after three big lenders failed last year, and progressive groups and some Democrats may criticize the Fed for being too soft on the industry.

In public campaigns and conversations with Washington lawmakers and regulators, 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 said this summer 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.  Spokespeople for the OCC and FDIC did not respond to requests for comment on Barr's remarks.

Barr's speech, in which he emphasized Basel was a joint project with the other two agencies, indicates the regulators have agreed on a path forward. A key question, though, is whether Barr's plan will do enough to satisfy Wall Street banks and stave off litigation.

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 Fed's decision to overhaul the GSIB surcharge plan is also a win for big banks, who have lobbied the central bank for years to update the rule to account for economic growth, which would in turn lower their capital burdens.

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.

Barr said the Fed is not rushing to finish regulatory work before the election.

(Reporting by Pete Schroeder in Washington; Additional reporting by Nupur Anand, Saeed Azhar, and Caroline Valetkevitch in New York and Lisa Pauline Mattackal in Bengaluru; Editing by Michelle Price, Matthew Lewis and Paul Simao)