US capital hikes and other Wall Street bank rules now hinge on US election

By Pete Schroeder

WASHINGTON (Reuters) - U.S. regulators will not be able to finalize contentious bank capital hikes before the November presidential election, casting doubt over whether those and other stiff draft rules for Wall Street banks will be completed at all, said five people familiar with the matter.

The so-called Basel III Endgame rules would overhaul how banks with more than $100 billion in assets manage their capital, potentially crimping their lending and trading. Banks say extra capital is unnecessary and will hurt the economy, and have aggressively lobbied to kill Basel.

Now, the outcome of that fight will depend on the Nov. 5 election.

The Democratic candidate for president, Vice President Kamala Harris, has called for strengthening bank rules. But if Republican candidate Donald Trump wins, his administration is widely expected to rip up or dramatically weaken the new rules, the sources said. Trump has pledged to cut red tape.

The two candidates are locked in a tight race although Harris is leading in some battleground states.

Regulators have been arguing for months over whether to reissue the Basel draft and allow banks to feed back, Reuters reported in June.

Industry executives widely expect the agencies will re-propose the rule after Federal Reserve Chair Jerome Powell told Congress last month it was "essential" to do so given there had been major changes. But it remains unclear how the Fed will persuade the other agencies, which want to finalize the rule before the election, to back that plan, the sources said.

Even if the agencies reach an agreement next month at the earliest, they would likely give banks at least 60 days to provide feedback, which is typical for complex rules, the sources said. That would make it almost impossible for officials to absorb the comments and achieve a final draft before a new U.S. administration takes over in January 2025, the sources said.

That previously unreported timeline endangers Basel and two other debt and liquidity rules for big banks which cannot be completed until the Basel draft is in good shape and the staff working on it are freed up, the people said.

Combined, the rules could require banks to hold more than $200 billion in extra capital and debt, based on regulatory estimates, meaning substantial or indefinite delays could be extremely valuable to the industry.

Some progressives who favor tougher rules fret that the Basel fight in which banks have spent millions of dollars on public campaigns will ultimately succeed in stymieing the sweeping regulatory overhaul they had hoped for under Democratic leadership, despite last year's bank failures exposing risks in the system.

"They were overly optimistic about how easy it would be to get Basel III Endgame done. When it turned out that wouldn't be as easy, that just sucked up all the oxygen," said University of Michigan professor Jeremy Kress, referring to the agencies.

Spokespeople for the Fed, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), which are jointly drafting the rules, declined to comment. Spokespeople for the Harris and Trump campaigns did not respond to requests for comment.

Speaking to Congress in July, Powell said his goal was to get Basel right, "not do it quickly."

'MALPRACTICE'

Several Fed officials share Powell's view that the new draft must be re-proposed, two of the sources said. Some believe that would reduce the risk that Wall Street banks will sue to kill the final rule on the grounds the agencies did not follow proper procedure, Reuters previously reported.

While the OCC and FDIC are against re-proposing, it would be almost unprecedented for them to finalize the draft without the Fed.

"It's too substantial of a proposal, it would be malpractice for them to finalize at this stage, in my opinion," said Michael Bright, CEO of the Structured Finance Association, an industry group pushing for some changes to the draft. "I don't think this is going to be done before the election."

Trump could not remove Fed regulatory chief Michael Barr, but he could immediately replace Acting Comptroller Michael Hsu and tilt the FDIC board, which votes on rules, toward Republicans. Those changes would quickly hand control of the majority of the bank regulatory agenda to Trump appointees.

Another major draft rule at risk directs large regional banks to issue up to $70 billion in new long-term debt to buffer potential losses.

Proposed a year ago, that rule is delayed partly because the amount of debt banks will have to hold depends on how Basel measures their risks, two sources said. Work on that rule could proceed when there is "support" for the final Basel draft, Powell said in July.

Also stuck behind Basel is a plan officials have flagged to impose new liquidity rules on banks, the sources said.

Even if Harris wins, the expected appointment of FDIC chair nominee Christy Goldsmith Romero could delay the rules further, and if the Senate flips to Republicans, political pressure to weaken the rules could increase.

"There are a whole lot of things up in the air," said Bright.

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