Fed "Changes Face" to Ease Regulations, Wall Street Giants' Funds About to Be Unlocked?

Source: Jin10 Data

The Federal Reserve plans to make concessions on Wall Street, with bankers celebrating victory, while opponents warn that excessive buffer cuts are playing with fire!

On Thursday, the Federal Reserve announced a proposal to relax capital requirements for Wall Street’s major lenders. This move could free up billions of dollars for lending, share buybacks, and dividend payments.

The proposal is currently in a 90-day public consultation period. It was developed jointly by officials from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). On Thursday, the Federal Reserve Board and the FDIC Board voted to formally propose the plan.

Federal Reserve Vice Chair for Supervision Michael Barr stated, “These adjustments will strengthen our overall capital framework, which will remain robust under the new system.”

For Wall Street, these proposals mark a significant victory. Previously, major banking groups had strongly opposed the plan introduced in 2023 to significantly increase capital requirements. Since then, top regulators largely accepted the deregulatory trend under Trump, as the government aimed to loosen industry constraints to help traditional lenders compete with non-bank institutions and private credit.

If finalized, along with measures to relax enhanced supplementary leverage ratios and reform stress testing, this will be the most significant change to bank capital rules since the 2008 financial crisis.

The Fed noted in a memo that, overall, these proposals are expected to lead to “moderate reductions” in capital requirements for some banks. For the largest banks, Common Equity Tier 1 (CET1) capital is expected to decrease by about 4.8%; for medium-sized banks, a total reduction of 5.2%; and small banks could face a 7.8% cut in capital.

Fitch Ratings stated in a release that, in the short term, capital levels are unlikely to drop sharply, but warned that if stress tests, leverage rules, and risk-based standards are gradually relaxed, it could weaken buffers and rating margins in the medium to long term.

Part of the plan is linked to Basel III, an international agreement aimed at preventing future bank failures and financial crises.

Specifically, this part will eliminate the “redundant” calculation method used by large banks and more accurately capture credit, market, and operational risks of the biggest, most internationally active banks. The goal is to ensure these banks’ requirements reflect their actual capacity to absorb losses, such as their ability to handle interest rate risk.

Regulators expect this measure will slightly increase the capital of banks like Citibank, Bank of America, and JPMorgan Chase.

Compared to the 2023 plan, this proposal marks a dramatic shift from the regulations proposed during the Trump era. The 2023 plan attempted to require some large banks to hold more capital to buffer potential losses. Critics argued that significantly increasing capital requirements would raise lending costs and put U.S. banks at a disadvantage internationally; supporters believed it was vital for financial stability.

Another part of the Thursday announcement targets medium-sized banks’ risk sensitivity, adopting a standardized approach and requiring more banks to include unrealized gains and losses on securities in their capital ratios. Regulators said this would also strengthen mortgage, consumer, and corporate loans.

The Fed also announced a plan to adjust the additional capital buffer for U.S. global systemically important banks (G-SIBs). Officials said the buffer would be indexed to changes in nominal GDP, making this tool more aligned with international standards.

Fed Chair Jerome Powell said this would allow banks to grow without increasing systemic capital surcharges. The plan also proposes allocating the additional fee in increments of 10 basis points, down from the previous 50 basis points.

Michael Barr, Fed Vice Chair for Supervision, opposed this, calling the significant reduction in capital requirements “unnecessary and unwise.”

Industry groups such as the Bank Policy Institute, the Financial Services Forum, and the Securities Industry and Financial Markets Association (SIFMA) expressed support for these measures. However, some Democratic lawmakers and scholars criticized the move as overly industry-friendly and harmful to ordinary American families.

Jeremy Kress, a former bank policy lawyer at the Fed now teaching at the University of Michigan, said, “The projected decline in capital levels is just a preliminary estimate. Once banks submit comments and optimize their balance sheets under the final rules, we may see larger capital reductions.”

Meanwhile, U.S. regulators’ divergence plans have sparked calls across the Atlantic for European regulators to take similar actions.

Travis Hill, head of the FDIC, said Thursday, “Adjusting capital requirements always involves balancing multiple competing objectives, including resilience against shocks and promoting economic growth.”