Banks Fine-Tune Critiques of US Capital Plan to Sway Fed’s Michael Barr

Katanga Johnson
·5 min read
1

(Bloomberg) -- Wall Street is delivering on its promise to deliver reams of feedback on US regulator’s proposed bank capital overhaul, asking for substantial changes or even an entirely new plan.

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In comments due Tuesday, the industry is formalizing its critiques of a plan that would force the biggest lenders to increase their capital levels by 19%, a move aimed at avoiding future bank failures and another financial crisis. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency must take those suggestions into account before completing the rules.

The industry has argued that the plan overstates how much cushion lenders would need to cover unexpected hits to business lines such as mortgage lending, operational and trading activities, and fee-based services.

Read More: Fed’s Michael Barr Is Open to Concessions on Bank Capital Rules

Michael Barr, the Fed’s vice chair for supervision, is open to considering changes in those specific areas, according to two people familiar with his thinking. Publicly, he has said that he has heard the concerns.

“We welcome all comments that provide the agencies with additional data and perspectives to help ensure the rules accurately reflect risk,” Barr said in October at the American Bankers Association’s annual convention.

Top financial watchdogs and their supporters have said that banks need to keep strengthening their capital positions given lessons learned from the devastation caused by the 2008 financial crisis.

“Stronger capital standards are critically necessary to protect people from financial crises that harm individuals, households and communities across the country,” Americans for Financial Reform, a Washington-based coalition of consumer and investor advocates, wrote in a comment letter Tuesday.

Banks are spending “vast lobbying dollars to cloak themselves in the mantle of preserving access to credit,” the group said. “But the truth that the banks avoid debating is that the overwhelming impact of higher bank capital is — by design — to restrict how risky and how big the more speculative aspects of their business, notably their trading and investment bank operations, can grow.”

A group of 30 banking and finance scholars also supported the regulators’ plan, emphasizing that it would not only “better calibrate” capital mandates to the risks that large banks pose to society but also improve their resilience and ensure they can continue lending throughout the economic cycle. Capital requirements lower costs to the public, as well as healthy banks, when a lender fails, they said.

“We urge the banking agencies to finalize the proposed rule without delay and without weakening its provisions,” the academics wrote.

The letter’s authors include Jeremy Kress, a former banking policy attorney at the Fed who now teaches business law at the University of Michigan; economist Stephen Cecchetti, Rosen Family Chair in International Finance at Brandeis International Business School; Kathryn Judge, a professor at Columbia Law School; and Arthur Wilmarth, professor emeritus at George Washington University Law School.

Fed Resistance

The industry has waged a fierce lobbying and public-relations campaign against the capital proposal. Banks claim the plan will make them less competitive — and home and business loans less affordable. Pushback has also come from congressional Republicans, a few Democrats and even within the Fed.

“It’s got to have a major overhaul, in my view, to get a reasonable product and possibly even just taking it back and starting over,” Fed Governor Christopher Waller said in a speech Tuesday at the Brookings Institution, a Washington-based think tank.

Waller, who was appointed during the Trump administration, said the plan would affect capital-market functioning in terms of product services and pricing.

He also repeated his criticism about the plan’s capital allocations tied to operational risk — which includes losses due to fines and lawsuits. Operational risk represented more than half of the increase, “and the way it’s calculated made absolutely no sense to me whatsoever,” Waller said.

The proposed package, which may be wrapped up by midyear, is a hefty one at almost 1,100 pages. Comments from banks, trade groups, academics and others are expected to more than match that page count.

Under the regulators’ rulemaking process, officials must review the comments, make any necessary tweaks and vote again to finalize the plan. Although there isn’t a strict timeline, the looming 2024 elections — and the possibility that a Republican wins the White House — add pressure on Barr and others to move quickly.

Trade Groups

There’s also a legal threat.

In a comment letter submitted Friday, the Bank Policy Institute, Financial Services Forum, Securities Industry and Financial Markets Association, and the U.S. Chamber of Commerce claimed that the regulators’ proposal violated the Administrative Procedure Act, which governs the process in developing regulations.

Among their arguments are that the agencies didn’t undertake a policymaking process that was “deliberate, transparent and based on all available data” and failed to consider alternative solutions. The groups said the regulators should re-propose the rule.

The Bank Policy Institute has hired Eugene Scalia, who served as Labor secretary during the Trump administration and is now a partner at the law firm Gibson Dunn, to craft a legal strategy, a spokesman for the trade group said.

Isaac Boltansky, a Washington-based bank analyst and policy research director at financial services firm BTIG, said he believes the capital proposal is ripe for changes.

“Any debate is over how much,” he said.

(Updates with comments on proposal, Waller speech starting in ninth paragraph.)

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