‘The banks have won’: Fed, regulators at impasse over capital rule overhaul

Federal regulators are at odds over how to advance a sweeping plan to require the nation’s biggest banks to strengthen their financial resilience — and they’re running up against a presidential election that could jeopardize the entire project.

Officials at the Federal Reserve and other regulators, which jointly unveiled the proposal in July 2023, have been negotiating for months over how to move forward with the draft rules in the face of a furious lobbying effort by Wall Street.

But they have been unable to reach a consensus on what their next steps should be, according to people familiar with the discussions, further complicating efforts to agree on revisions to the proposal, which would sharply increase banks’ capital requirements.

That means further delay — a victory for the banks — and a high likelihood that the rules won’t be completed until the next president takes office. If former President Donald Trump wins a second term, that could mean a wholesale reconsideration of the plan.

“The banks have won,” said Dennis Kelleher, who leads Better Markets, an advocacy group pushing for a strict rule. “They have delay, stalemate. … It doesn’t get better than that if you’re Wall Street.”

Since the draft regulation was put out last year, big banks have gone to war over it, making it a top lobbying priority to rein it in and even running commercials during NFL games to try to sway public opinion. GOP lawmakers have grilled the bank regulators over the proposal, and many smaller lenders have joined in opposition, arguing that the rules could harm the broader industry.

The impasse reflects the tension between progressive regulators empowered by the Biden administration and more industry-sympathetic voices like Fed Chair Jerome Powell. It also underscores the proposal’s complexity: While higher capital requirements are generally popular among Democrats looking to avoid future bank bailouts, aspects of the draft have gotten pushback even from progressive allies, like civil rights groups.

Regulators have been working on the proposal to toughen capital rules for big banks for years, aiming to better prepare them to absorb losses from internal mismanagement, market volatility or defaulted assets. It’s intended to be the last of the regulatory changes enacted in the wake of the 2008 financial crisis and is based on international standards negotiated in 2017.

Even if the rules move forward, the industry looks poised for success. Agency officials have broadly agreed to dial back at least some parts of the proposal, which critics say would unfairly penalize banks for less-risky activities like wealth management and make it harder for lower-income people to access some forms of credit.

But the path to finalization is still murky.

The Fed’s Powell — who has vowed to make significant changes in response to concerns from industry groups, Republicans and some Democrats — has pushed to put out a revised proposal for public input. That would mean the rules wouldn’t be completed until the first half of next year at the earliest.

Meanwhile, progressive officials at the other federal bank regulators — including FDIC Chair Martin Gruenberg and Consumer Financial Protection Bureau Director Rohit Chopra — are generally seeking to finalize a tougher rule that more significantly raises capital standards.

Spokespeople for the Fed and FDIC declined to comment. A spokesperson for the Office of the Comptroller of the Currency, another key regulator, did not have a comment.

Bank groups have suggested they’ll sue over the policy. And one legal issue looming over the process is whether any final regulation deviates too much from the initial proposal.

Officials have discussed putting out a new analysis of the proposal that relies on updated data alongside a set of about 20 questions that solicit further public feedback on some of the changes that regulators are weighing, according to people familiar with the discussions. But there’s no clear agreement on taking such a step.

Either way, industry experts say the banks are likely to come out ahead.

“The exact procedural path forward is clear as mud,” said Isaac Boltansky, director of policy research at BTIG. But the industry sees the process moving in a generally favorable direction, he said.

“From a market perspective, there's confidence that the rule is going to be softened,” he said. “The debate is around how much and when.”