Fed proposes easing capital rules for largest US banks
Regulatory overhaul targets G-SIB surcharge reduction and improved risk weightings
Federal Reserve Vice Chair Michelle Bowman unveiled proposals on Thursday to reduce capital requirements for large U.S. banks, marking a significant shift in the regulatory landscape for financial institutions following years of increased scrutiny. The plan targets a "small decrease" for the largest banks and "slightly larger" cuts for smaller institutions, according to Bowman's speech.
The proposal includes a reduction in the globally systemically important bank (G-SIB) surcharge, which currently imposes additional capital buffers on institutions deemed critical to the financial system. Banks such as JPMorgan Chase, Bank of America, and Citigroup would benefit from these changes, potentially freeing up billions in capital that could be returned to shareholders through buybacks and dividends or deployed in lending activities.
Key provisions include eliminating duplicative capital calculations and shifting mortgage servicing assets from a deduction treatment to a 250% risk weight. The changes also aim to improve risk alignment for mortgages and consumer lending, according to the Wall Street Journal.
"These adjustments will better align capital requirements with actual risk profiles," regulators said in the announcement, which comes as banks face ongoing pressure from higher interest rates and economic uncertainty. The Fed board is expected to vote soon on the proposals, which would then enter a 90-day public comment period.
The regulatory relief comes as the largest U.S. banks continue trading below their analyst price targets. JPMorgan Chase closed Wednesday at $286.48, 17% below analysts' consensus target of $344.78, according to market data. Bank of America trades at $46.47, with analysts seeing 34% upside to their $62.19 target, while Citigroup at $108.49 is 24% below its $134.32 objective.
The banking sector has faced heightened capital requirements in the wake of the 2008 financial crisis and subsequent regulatory overhauls including the Dodd-Frank Act and Basel III accords. Industry executives have long argued that excessive capital constraints limit economic growth and put U.S. banks at a competitive disadvantage to European and Asian peers.
Analysts at Morgan Stanley and Goldman Sachs have previously estimated that even modest reductions in capital requirements could generate billions in additional annual earnings for the largest banks through improved return on equity. The G-SIB surcharge alone costs the largest U.S. banks tens of billions in capital buffers that cannot be deployed elsewhere.
The proposal represents one of the most significant regulatory rollbacks for the banking sector since the Trump administration. Its fate will depend on the composition of the Fed board following upcoming appointments and the broader political climate around financial regulation. Banks and their trade groups are expected to mount an aggressive lobbying campaign during the comment period to advocate for the most favorable possible implementation.