Federal Reserve Vice Chair for Supervision Michelle Bowman announced that large bank capital requirements in the US will be slightly reduced under revised drafts of new regulations. These changes mark a significant shift from the initial 2023 proposal, which had projected double-digit increases and sparked substantial pushback from Wall Street lenders. The adjustments are part of a broader capital overhaul aimed at easing rules implemented after the 2007-09 financial crisis, which banks argue have hindered economic growth.
Speaking at the Cato Institute, Bowman outlined adjustments to the Basel rules and the GSIB surcharge, which dictate the amount of funds banks must reserve to absorb potential losses. She stated the modifications would better align requirements with actual risks. The Fed is scheduled to vote on the proposal at a board meeting next week. Echoing industry arguments, Bowman noted that recent increases in industry-wide capital levels have been excessive and detrimental. She emphasised the importance of balancing capital requirements with the banking system’s function of providing credit to the economy.
Major banking groups have lauded Bowman’s plan, while also noting that a full understanding of the potential impacts will require a detailed review of the draft. Conversely, critics such as Democratic Senator Elizabeth Warren argue the changes weaken financial system safeguards at a time when geopolitical tensions and deteriorating credit conditions are unsettling markets. Warren stated the Basel plan creates a “weak rule” that fails to address flaws in the capital framework that have persisted since the 2008 financial crisis, potentially endangering the entire economy.
Bowman aims to finalise the changes swiftly. However, the complexity of the rules means they will undergo 90 days of industry and public feedback, possibly delaying completion until the end of the year. A Morgan Stanley research note indicated large banks currently hold over $175 billion in excess capital, and the clarity offered by these revised rules could enable increased lending and share buybacks.
