What are the implications of the revised plan for the industry?
Federal Reserve chair Jerome Powell recently held a private meeting with the chief executives of major US banks, urging them to collaborate with the Federal Reserve to avert a protracted legal battle over a crucial capital proposal from the Biden administration. The proposal, aimed at strengthening the financial system in the wake of the 2008 global financial crisis, has encountered resistance from the banking industry, which is preparing for a potential legal confrontation.
The meeting, held in Washington, included prominent figures such as JPMorgan Chase & Co.’s Jamie Dimon, Citigroup Inc.’s Jane Fraser, Bank of America Corp.’s Brian Moynihan, and Morgan Stanley’s Ted Pick. Hosted by the Financial Services Forum, a trade group representing the largest US banks, the gathering provided a platform for Powell to emphasize the importance of reaching a consensus on the capital plan. Powell stressed that the public would have the opportunity to provide feedback on key aspects of the proposal, a Bloomberg report noted.
While it is not unusual for Powell or other Fed governors to engage with top bank CEOs, this particular discussion highlighted the chair’s active role in seeking alignment between the banking industry and the Federal Reserve. The proposal, known as the Basel III endgame, has been in development for over a decade. However, its advancement has been hindered by industry opposition, which has led to concerns that a lengthy legal dispute could delay its implementation.
Facing industry resistance and regulatory uncertainty
The capital plan, originally drafted in July 2023 by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), called for a 16% increase in the capital banks must hold as a buffer against financial shocks. However, the Fed later presented a revised version to other regulators, suggesting a smaller increase of as low as 5%. This softer approach raised alarms among some officials who fear the revisions could undermine the plan’s effectiveness, particularly in relation to large banks with significant trading operations.
Powell reassured US lawmakers in a recent testimony that no final decision had been made regarding the proposed changes, but he acknowledged that “quite a bit of progress” had been made. Nonetheless, some FDIC and OCC officials have privately expressed concerns that the Fed might proceed independently if the three regulators fail to reach a consensus.
The potential for the Fed to act alone has raised questions about the coherence of the regulatory framework. FDIC vice chairman Travis Hill warned that such a move would be unprecedented, potentially leading to confusion and legal challenges.
During the meeting with bank CEOs, Powell faced questions about whether the Fed would move forward independently with key revisions. Although Powell did not provide a definitive answer, some participants left the meeting with the impression that the Fed could consider this option, Bloomberg noted.
Powell’s remarks to the banks were described as high-level, focusing on the importance of reaching a final rule through public comments and impact studies. He urged banks to address any concerns with the Fed now to avoid legal conflicts later.
The Bank Policy Institute, a trade group, has already retained corporate litigator Eugene Scalia to challenge the regulators if the final rule lacks significant changes.
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