Fed’s Bowman talks up compromise as comments on bank capital requirements roll in

Policy makers should modify the proposal’s shortcomings, including its higher capital requirements. In its current form, the capital requirements, also known as the Basel III endgame, would exceed agreed-upon international standards, she said.

“Increasing capital requirements as initially proposed could result in significant harm to the U.S. economy through the impact on U.S. businesses, while failing to achieve the intended goals of improving safety and soundness and promoting financial stability,” she said.

Regulators could also do more to tailor the capital requirements to banks based on size, she said, rather than the current proposal to have a broad set of rules kick in once banks reach $100 billion in assets.

“Bank capital policy involves tradeoffs and policy decisions, and as you all know, policy makers have different views about how to strike the right balance,” Bowman said. “But as I view the landscape today, I do not view
these differences as insurmountable obstacles to achieving a more effective and efficient set of Basel capital reforms.”

Ian Katz, an analyst with Capital Alpha Partners, said it’s unlikely that regulators will withdraw the Basel III endgame proposals entirely, but that there could be “significant changes.”

More clues on the direction regulators are headed could emerge from a speech Thursday by Michael Hsu, who heads the Office of the Comptroller of the Currency.

Meanwhile, the Bank Policy Institute and the American Bankers Association released a 314-page comment letter that said the proposal would hurt the U.S. economy in the face of the macroeconomic challenges of the past year.

“The capital build required by the proposal … would be far more demanding and would inevitably force banks out of certain business lines, require them to charge higher prices and fees, and reduce the number
of marginal customers — all to the detriment of the Americans saving for their retirements, consumers of goods and services, small businesses, companies seeking access to the capital markets, businesses seeking
to hedge risk, pension funds and even smaller banks not subject to the proposal — ultimately, the entire American economy,” the letter from the banking groups said.

Ed Mills, an analyst for Raymond James, said in a research note that Michael Barr, the Fed’s vice chair for supervision, has signaled a willingness to make changes in the proposal, but that it’s still likely the industry would take its fight to the courts in the form of a lawsuit.

The rules could also be overturned if a Republican wins the White House in November, he said.

“The new bank capital rules may never go into effect,” Mills said.

At an appearance at the Brookings Institution on Tuesday, Fed governor Christopher Waller said he voted against the proposal when it was first floated last year because it poses major problems.

“First of all, the original intent of this thing was to harmonize regulation across the world, and it was not happening,” he said. “We’re basically going to impinge on capital-market functioning both in terms of product services and pricing. I don’t understand why we want to do that.”

The way operational risk is calculated made no sense to him, he said.  

“It might even be best to just pull it back and then work on this and then put it back on later date,” Waller said.

Also read: Fed community-bank advocate Michelle Bowman says proposed bank reforms go beyond what the law intends

Greg Robb contributed.