Alongside America’s highways, billboards jostle for drivers’ attention. But in some roadside locations the usual adverts for churches, auto dealers and drive-through burger joints have been joined by publicity for a more unusual topic: bank capital rules.
Since late July, when US banking regulators unveiled plans that they say will make banks safer, the issue has been forced into the mainstream like never before. Passengers at Washington’s Ronald Reagan National Airport are greeted by another billboard. Adverts opposing the rules are popping up in podcasts and television shows. There was even talk of a slot at this year’s Super Bowl.
They warn of dire consequences for “everyday Americans” if the authorities push ahead with reforms that are officially known as “the finalisation of Basel III” but have been apocalyptically termed “the Basel Endgame” in the US. Both monikers refer to the Swiss city in which the committee that formulates the rules meets.
While the high cost of food and housing continues to occupy most voters, those roused to anger over capital ratios can head to a website and register their concerns with their elected representatives.
Republicans in Congress are leading cross-party opposition to the trio of domestic regulators implementing the reforms in the US. They say the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have exceeded their remit and could diminish the competitiveness of US banks by unilaterally applying harsher measures than those agreed globally.
The country’s most senior bankers have lined up to publicly lambast the proposals. Jamie Dimon, chief executive of JPMorgan Chase, has warned that they risk making US banks uninvestable. Banking lobby groups have threatened lawsuits.
How the US plans compare to other markets
Regulators’ estimates for an increase in capital requirements under the final Basel package
Figures are estimates of aggregate tier one capital requirement increases; EU estimates fall to 5.6 per cent during the transition period
Randal Quarles, who headed the Fed’s supervisory arm from 2017 to 2021, describes aspects of the resistance as “unprecedented” in his lifetime, pointing to the “pervasiveness” of the ad campaign and the industry’s willingness to resort to litigation.
“The (industry) calculus in the past has been described to me as ‘we don’t want to anger our supervisor so we haven’t sued them’,” Quarles says. “Now banks are saying ‘we don’t see how this could get worse’.”
Wall Street veterans say the open and fierce opposition eclipses even the pushback against the Dodd-Frank Act, a package of rules passed after the financial crisis that heralded far bigger changes to the way banks are run. “I’ve never seen anything like this,” says Jarryd Anderson, co-chair of the financial services group at law firm Paul, Weiss.
Advocates of the stricter rules, which include many smaller banks, say concerns that mom-and-pop businesses will be starved of credit are overblown. They argue that US banks, which have recovered strongly from the crisis and are more profitable than their European peers, can easily afford to absorb the impact.
Others say such pushback is inevitable whenever new regulation is proposed, and is part of the negotiation process.
But critics insist the rules are an unwarranted assault on an American success story. “The fight over the Basel Endgame is a fight for what the industry is going to look like 10 years from now,” says Andrew Olmem, a partner at Mayer Brown and former deputy director of the National Economic Council.
“Paradoxically, the risk is that the US ends up with a banking system that is far more uniform, and therefore more prone to systemic risks.”
Basel, an industrial city on the upper reaches of the Rhine, has become synonymous with global banking regulation. It is home to the Bank for International Settlements — the central bank for central banks — and the Basel Committee on Banking Supervision, which sets the rules by which the world’s banks do business.
The roots of the current battle stretch back to an agreement reached by the committee in 2017 in response to concerns that Basel III, the package of reforms implemented in the aftermath of the 2007-08 financial crisis, had failed to close all potential loopholes in the rules designed to safeguard the banking system.
In particular, they wanted to revisit risk-weighted assets, or RWA. These are calculated by applying a risk weighting to banks’ businesses, including loans they have made to their customers. They are the denominator in the capital ratios that show how well positioned banks are to withstand losses; lower RWAs make banks look healthier.
A set of rules dating back to 2004 allowed banks to use their own models to calculate RWA rather than standard measures of risk laid down by supervisors — and a string of studies had shown vast discrepancies in the ways that banks did that.
The committee argues that a “wide range of stakeholders lost faith in banks’ reported risk-weighted capital ratios” and that its proposed revisions, which greatly restrict the use of in-house models, “will help restore credibility in the calculation of RWA”.
Those involved in the discussions say US regulators were mostly on the same page as their international peers. By the time Quarles left office in late 2021, he and his fellow regulators had agreed on a package that they estimated would result in “mid-single-digit” percentage increases for US banks’ capital requirements — a number consistent with other jurisdictions.
But when the detailed proposals were issued in July 2023, regulators were operating in a changed world; the White House had passed from Donald Trump, who presided over a wave of deregulation, to President Joe Biden, disposed to stricter policies.
The US had also suffered its first serious banking stress since the financial crisis, with a spate of regional banks collapsing in the first half of that year. In Europe, the implosion of Credit Suisse showed that even bigger lenders were not immune to turmoil.
In response, US regulators issued rules that would increase system-wide capital requirements by 16 per cent. In a nod to last year’s regional banking crisis, the package also proposed that banks with $100bn to $250bn of assets would have to follow most of the Basel rules for the first time. That will bring the number of banks covered to around 40, leaving the vast majority of US banks unaffected.
There are several reasons why the impact of the package has been greater in the US. But the main one is that regulators there chose to exceed the global standards, particularly in “operational risk” — such as cyber crime — where the US has gone for a more conservative approach that means banks with lower historical losses cannot use that to reduce their current capital requirement.
Banks say the changes to RWA calculations will lead to significant hikes in capital requirements for mortgages, corporate loans and loans to other financial institutions. More capital will also be needed for the less risky sectors such as wealth management that banks were encouraged to pivot towards in the aftermath of the crash.
JPMorgan said it was facing a 25 per cent jump in capital requirements, while analysts at Autonomous predicted American Express might need 40 per cent more capital.
The proposals sparked shock across Wall Street, followed swiftly by outrage.
“What’s happening now — it’s like the movie Network, where the main character says ‘I’m as mad as hell, and I’m not going to take this anymore’,” says Gene Ludwig, a former Comptroller of the Currency and now chief executive of industry consultants Ludwig Advisors, referring to a 1976 comic thriller. “I think banks have just had enough and are tremendously upset.”
Bank executives argue that the rules are not needed because banks are already financially strong. According to the Financial Services Forum, which lobbies for the eight largest US banks, its members had $940bn of capital at the end of 2023, up from just under $297bn in 2009.
“These banks have been absolutely fortified from a regulatory perspective over the past 15 years,” says Sean Campbell, chief economist and head of policy research at the FSF.
“An additional 30 per cent [in capital] is going to yield a very, very little increase in safety and soundness, but the cost increases proportionately,” adds Campbell, who previously worked as an associate director in the Fed’s supervision and regulation division. The RWA increase falls heaviest on the nine biggest banks, all but one of whom are FSF members. They would see a 24 per cent rise in RWA based on the original proposals, versus the 9 per cent increase for smaller banks.
Some bankers argue that will leave big American banks at a competitive disadvantage to international rivals in the eyes of both clients and investors.
They also say higher capital requirements for trading businesses will have real-world consequences — threatening activities such as hedging contracts for airlines’ fuel bills or retailers’ foreign-exchange exposure — while rules on credit risk threaten lending to ordinary Americans and small businesses.
Todd McCracken, president of the National Small Business Association, an advocacy group, says his members are “worried about some additional consolidation and uniformity and in the types of financial institutions that we have that might come from this.” If more banks merge in response to the new rules, that could reduce competition in the market.
Some of these arguments have supporters beyond those with an obvious axe to grind. Ludwig, the former OCC boss, agrees that the case for change isn’t as strong as when Dodd-Frank was enacted. “Things are different now after over a decade of improvement and sound operation,” he adds.
$2.2tnIncrease in RWA at banks’ businesses, of which $880bn is trading businesses and $380bn is lending businesses (the rest is other)
But others are sceptical, especially regarding big banks’ lobbying around the availability of loans. In its comment letter, the Independent Community Banks Association said it “generally supports” the proposals and the need to “ensure some level of uniformity” in how large financial institutions calculate capital, especially since regulators may rely upon them to “rescue troubled banks at a moment’s notice when depositors flee”.
Michael Hsu, the current Comptroller of the Currency, points out that if lending becomes more expensive, banks could spend less of their multi-billion-dollar profits on dividends and stock repurchases, rather than rationing loans. “There’s a choice to be made with capital,” he told the FT in January.
The regulators’ proposals note that based on end-2021 calculations, five large banks were short between 16 and 105 basis points of capital to meet the new requirements. But they also state that “the largest US bank holding companies annually earned an average of 180 basis points of capital ratio between 2015 and 2022” — implying they should have no difficulty covering any shortfall.
The larger impact on US banks’ trading business was an intended consequence of the package not an accidental one, according to financial regulation experts. “Market risk was significantly under calibrated,” says Bill Coen, previously head of the secretariat at the global committee that draws up rules, referring to banks overall.
Mark Conrad, who manages the financial equity portfolio for asset manager Algebris says that if the rules go through as proposed, “it’s a significant (RWA) inflation for Goldman, JPMorgan, the big (US) investment banks that will have real ramifications for how they operate.”
“In theory it [loss of competitiveness] is definitely a legitimate concern, in practice, I’m not sure you’re going to see it. If you look at the European banks, very few of them are actively in a position where they are seeking share.”
By the end of 2023, big banks, their industry groups and other interested parties had hired 486 federal lobbyists to press their case to lawmakers, according to a Reuters analysis of data from anti-lobbying association, Open Secrets. It represents the industry’s biggest lobbying effort since the global financial crisis.
Some 97 per cent of the hundreds of responses to regulators’ consultation expressed concern about some of the measures, according to analysis from law firm Latham & Watkins.
The Fed has indicated its willingness to compromise, especially where banks can offer evidence of the impact the measures will have, according to people briefed on those discussions.
Jay Powell, the central bank’s chair, said earlier this month that “broad and material changes” are likely and acknowledged concerns that, in their current guise, the rules could undermine competition in the banking sector. He has not ruled out a re-proposal of the rule.
Analysts at Autonomous say investors now expect the hit to large banks to be roughly half what they initially feared, though they cautioned that talks on the revisions “still seem early stage”.
Coen says observers “must understand the process” of rulemaking. “Very often a standard-setting body or a regulator will consult on a proposal that leans towards the conservative side,” he adds. “Once comments are considered . . . it is very difficult to adopt a final standard or rule that is more conservative than the original proposal.”
Anil Kashyap, a professor at the University of Chicago’s Booth School of Business, says complexity “is a fair critique” of the rules and that it is very tricky” to strike the right balance. “Often it takes an egregious mess-up to see whether a calibration was reasonable or not.”
Seasoned financial regulation observers say there are ways for the Fed, the most high-profile of the agencies involved, to climb down from some of the proposals without damaging its credibility.
If not, legal challenges remain a possibility. “We’ve done that work and we certainly have that option,” says Greg Baer, chief executive of the Bank Policy Institute, which represents large and mid-sized banks. The BPI has retained Gibson Dunn partner Eugene Scalia, labour secretary for part of Trump’s presidency and the son of former US Supreme Court justice Antonin Scalia.
The international regulatory community is also watching with interest — and some concern — about the fate of a proposal originally due to be implemented in 2022. The coronavirus pandemic necessitated a one-year deferral, then the endgame was shunted out to January 2025 by the UK and EU and July of that year by the US.
“People take notice [of the US position] everywhere, it’s the biggest banking centre in the world,” says one senior banking official. “The extent of the pushback is so visceral, you wonder whether it threatens the whole implementation . . . there’s a risk it stalls the whole thing.”
This article has been amended since original publication to clarify the number of US banks covered by the new rules
