The Federal Reserve has proposed halving capital requirements for the largest US banks

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The Federal Reserve has more than halved a proposal to raise capital requirements for the biggest US banks after a backlash from industry and politicians.

Michael Barr, the top US central bank regulator, announced a revised plan on Tuesday that will impose a 9% increase in capital requirements for the biggest lenders, down from the 19% proposed last summer.

The revised rules are a win for banks, which have lobbied against the proposal.

They were a blow to Barr, who had hoped to use the banking reform package to address what he saw as remaining vulnerabilities in the US financial system.

Last summer’s proposal applied to banks with assets of $100 billion or more. Now, the vast majority of rules no longer apply to those with less than $250 billion.

The revised rules came after a series of bank failures that brought down mid-sized lenders such as Silicon Valley Bank, Signature Bank and First Republic in 2023.

Wall Street lobbyists put up billboards and aired television ads warning of dire consequences for “ordinary Americans” if the rules, dubbed the “Basel Endgame,” were implemented as originally proposed.

The Financial Services Forum, which lobbies for the eight largest U.S. banks, said in a statement it would review the revisions and submit a comment as part of the Fed’s review process.

The campaign argued that the capital gains rules would reduce lending, hurt the economy and hurt minority communities.

An initial package of reforms called Basel III was implemented in the wake of the 2008 financial crisis and required certain banks to have a larger cushion of equity capital to absorb unexpected losses in the event of financial stress.

In 2017, international regulators agreed to strengthen that regime to close remaining loopholes to protect the banking system. However, Wall Street banks argued that the Fed’s interpretation of these rules for the US was even stricter than the global standard.

They particularly pointed to the Fed’s requirements on so-called operational risks, which cover possible outcomes such as cyber-attacks, fines and fraudulent trading.

The banks’ pushback has contributed to a years-long delay in the Fed proposing how the Basel loopholes in US capital rules should be closed.

In what Barr characterized Tuesday as a “re-proposal,” the latest rules will still introduce capital requirements related to operational risks. These requirements were previously based only on loans and investments on the banks’ books.

But the proposed rules will largely exclude as operational risk some of the big banks’ largest non-lending businesses, such as asset management, significantly reducing the additional capital needed to meet the new requirement.

The Fed also eliminated a so-called internal loss multiplier that would adjust lenders’ capital requirements based on past operating losses.

The mortgage and equity exposure requirements will no longer be as onerous as previously proposed. Banks will also be able to use their own models to assess market risks.

In a speech at the Brookings Institution, a think-tank, Barr said Tuesday that the changes were an “interim step,” adding that the Fed would seek additional feedback before voting on the proposal.

He argued that “extensive and material changes . . . would better balance the benefits and costs of capital. . . and results in a capital framework that properly reflects the risks of the bank’s activities”.

Barr and Fed Chairman Jay Powell have previously signaled openness to revising the rules after a comment period this year where stakeholders could provide feedback.

Powell acknowledged in March “real concerns” that the 2023 plans could add risk to the banking system and undermine market competition.

Both major US political parties have criticized previous proposals. Tim Scott, the top Republican on the Senate Banking Committee, said they would force “more money around the edges of the biggest economy on the planet and out of the hands of first-time home buyers, business owners and people trying to get the american position. dream”.

Democrats and nonprofit groups also criticized the rules for excluding riskier borrowers from the mortgage market.