In a recent proposal, the Federal Reserve wants to require banks to hold more capital. After numerous attempts at negotiating this proposal, mostly led by JPMorgan Chase’s Jamie Dimon, there are indications that regulators may be considering adjustments. The original proposal was meant to require a 19% increase in capital, which “would translate into roughly $150 billion more capital for the eight U.S. global systematically important banks, based on their current requirements” (Demos 2024). This is a massive increase in capital for the big banks and will have an effect on other things such as lending and retained earnings.
The initial intent of the increased capital mandate was to make sure that big banks were better protected against things such as cyberattacks, bank runs, recessions, etc. Although some may argue that this proposal is in the best interest of the banks, many believe that this requirement will reduce lending and create a “shift in the balance of power between big banks and their regulators” (Ackerman 2024). This proposal stems from a larger series of regulations agreed upon by regulators after the 2008 recession. They aim to allow the banking system to be better protected in case anything like that happens again.
By modifying the proposal and reducing the requirement by half, they could free up to $75 billion in capital. The Fed argues that by reducing the requirements it leaves banks more vulnerable to shocks. Could the Fed be hinting at a possible recession in the future or are they just being very cautious.
With discussion of possible changes to the proposal arising, bank stocks have risen. Another downside to this proposal, banks are about $8 billion short of meeting the capital requirement which is partly due to slower bank growth. In order to raise capital, banks will have to resort to retaining more earnings, limiting share buybacks which may upset shareholders expecting returns. Another thing banks are considering is advertising to bring in more clients rather than growing the clients they already have.
The Federal Reserve’s proposal to increase capital requirements has sparked debate and lobbying in the financial sector. Its intent to bolster the resilience of the banking system is not being received well by the big banks. At this point it is unknown whether there will be a change in the proposal or not. Some believe that Dimon’s efforts in negotiations will pay off and reduce the requirement or make changes elsewhere in the proposal. Others believe this is what is best for our banking system and the Fed will maintain the proposal as is.
Sources
Ackerman, A. (2024b, May 19). Exclusive | dimon led bank CEOS to fend off tougher capital rules. The Wall Street Journal. https://www.wsj.com/finance/regulation/dimon-led-bank-ceos-to-fend-off-tougher-capital-rules-b647756d
Demos, T. (2024, May 23). Washington’s pivot on bank rules could free up tens of billions. The Wall Street Journal. https://www.wsj.com/finance/regulation/washingtons-pivot-on-bank-rules-could-free-up-tens-of-billions-109713c0
US Commercial Banks Total Assets annual growth rate (I:USCBTAAY). YCharts. (n.d.). https://ycharts.com/indicators/us_commercial_banks_total_assets_annual_growth_rate_yearly#:~:text=Average%20Growth,Rate%206.00%25
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