Wall Street banks, boosted by the possibility of a Trump administration that is more friendly to them, are stepping up their efforts to revamp US capital regulations.
A Reuters article reveals that industry executives have an ambitious agenda for lobbying. They are aiming to reform the capital rules of the “Basel Endgame”, reduce global bank surcharges and adjust leverage restrictions.
The banks argue that these regulations, which were enacted in the wake of the financial crisis between 2007 and 2009, are too strict, as they tie up almost $1 trillion, money that would otherwise be used to fuel the economy by lending.
David Solomon, Goldman Sachs CEO, who lobbied to weaken Basel, said that he expects the new administration to lead to an overhaul of capital regulations.
We’re at a point where we could have a productive discussion on improving transparency, consistency and clarity.
Recent wins fuel confidence
Banking sector confidence is a result of its partial win last year. Lobbying efforts reduced the Basel proposal’s additional capital requirement by half.
Federal Reserve has also agreed to revise its stress test.
Reuters cited anonymous industry executives as saying that banks are motivated by their recent success and anticipate the appointment of officials who will be friendly to industry under Trump’s presidency — including a Federal Reserve regulator chief, which is expected 18 months before schedule.
After years of being criticized following the Financial Crisis, the executives stated that they believe it is past time to apologize.
As evidence of financial strength, they cite the resilience shown during the COVID-19 Pandemic as well as their role in stabilizing the regional banks throughout the turmoil that will occur during 2023. They argue that these institutions should not be burdened with excessive regulations.
Jeremy Barnum said during the earnings call on Wednesday that JPMorgan’s CGO Jeremy Barnum spoke out.
We want a regulatory framework which is rational and holistic, that allows banks to support the economy, but is not anti-bank.
Banks’ positions strengthened by legal and political changes
A judiciary that is becoming more skeptical about overreaching regulations adds to the momentum of Wall Street.
In a June ruling, the Supreme Court overturned an old precedent that required courts to defer agency interpretations when it came to ambiguous law.
The Fed’s stress test review acknowledges that the legal environment is changing, giving banks greater leverage in pushing for reforms.
Ed Mills is a Washington-based policy analyst for Raymond James.
This pendulum is now swinging back towards the banks. It has taken about 15 years for this shift to occur.
Lobbying aims to weaken Basel Rules and reduce surcharges
Banks are focusing on weakening Basel Endgame Rules, which restructure risk assessment frameworks.
Michael Barr, the Fed’s chief regulatory officer, had previously said that capital requirements could be increased by as little as 9% compared to their original requirement of 19%.
Sources said that banks are working to reduce this number to zero.
Sources say that banks are largely in agreement with the idea of ensuring a weaker regulation under Trump’s administration, rather than risking regulators cancelling the project. This could result in a future Democratic Administration reinstating a more strict version.
Brian Moynihan, CEO of Bank of America at a recent conference, emphasized the importance of regulators finalizing Basel’s framework while minimizing its impact.
Wall Street also wants to reduce the capital surcharge of $230 billion levied against globally systemic banking institutions (GSIBs), and change the supplementary lever ratio (SLR).
In the SLR, banks are required to maintain capital for all investment regardless of their risk. The banks want to exempt super-safe assets such as U.S. Treasury bonds from this calculation.
Federal Reserve stress tests are designed to measure a bank’s ability to withstand economic shocks. They have been controversial for years.
The tests have been criticized by banks for being too strict and opaque.
The Fed reviewed these tests last year. Banks are also taking legal actions to improve their transparency. This shows the importance of this tool.
Banks benefit from new regulatory leadership
Changes in leadership at the regulatory level have further boosted industry optimism.
Michelle Bowman is the Republican Fed Governor who has been a vocal critic of Michael Barr’s capital framework. She’s a leading candidate to succeed him as Fed’s chief regulator.
Travis Hill, who is poised to be the interim chair of Federal Deposit Insurance Corporation, (FDIC), supports expanding Basel Reforms in order to tackle additional capital concerns.
These appointments offer banks the chance to create a regulatory environment that is more pragmatic.
Despite the increasing influence of Wall Street lobbyists, regulators are still cautious.
Michael Hsu (acting Comptroller for the Currency), a leading bank regulator and acting comptroller, told Reuters that it is reasonable to ask questions about capital allocation, but the total amount of money in the system was “about right.”
Hsu cautioned, “In a specific case…you can turn down all the dials and zoom out to see that you’ve got a weaker system.”
As updates develop, this post-Trump era may spark hopes for looser rules on capital among Wall Street Banks.
