US banks eye capital victory as regulators tee up new Basel draft

U.S. President Donald Trump's bank ​regulators will unveil in coming weeks long-awaited draft rules that could ultimately shrink the amount of ​cash lenders must set aside to absorb losses, in a major potential victory for the industry.

The Federal Reserve and fellow agencies are expected this month to unveil a more industry-friendly draft of the "Basel" rule overhauling how lenders gauge risk, three industry executives said. The agencies also plan to release a related proposal easing an extra ‌capital surcharge levied on ⁠the riskiest global ⁠systemically important banks, or GSIBs, they said.

Fed Vice Chair for Supervision Michelle Bowman, who is leading the effort, is scheduled to give a speech on Basel on Thursday. Jonathan ​Gould, the Comptroller of the Currency, and Travis Hill, chair of the Federal Deposit Insurance Corporation, are also due to speak on regulatory issues at ​a Tuesday event.


The overhaul marks the culmination of a years-long effort by Wall Street banks to ease rules introduced following the 2007-09 financial crisis which they and the regulators say are stymieing economic growth. "I share the broad expectation that it will be quite friendly to banks. There ​has been talk from the regulators for a long time that it would be ⁠roughly capital ‌neutral. It's possible that it will be a bit better than that for some banks," said Ian Katz, managing ​director at Capital ​Alpha Partners.

INDUSTRY-FRIENDLY DRAFT

The Basel draft will change how capital is distributed, meaning overall capital levels are expected ⁠to remain unchanged for most banks, with Wall Street trading giants experiencing a small bump, ​Reuters reported in October. However, those rises could be mostly offset by adjustments to the GSIB ​surcharge.

At an industry conference, Fed General Counsel Mark Van Der Weide said regulators were aiming for a proposal that will not cause major industry disruption. The regulators are also easing a related leverage ratio, while the Fed is adjusting its annual bank health checks, which set some capital levels, by making the models more transparent.

All told, capital is expected to remain flat or fall slightly for most big banks, said the sources and analysts.

That expected outcome marks a dramatic turnaround for the industry, which faced a 19% increase when the proposal ‌was first unveiled by Bowman's Democratic predecessor Michael Barr, sparking an unprecedented industry pushback. Speaking at the same conference, Douglas Elliott, a partner at consultancy Oliver Wyman focused on bank rules, said that U.S. GSIB capital could fall as ​much as 10% in ​coming years, depending on how other details ⁠shake out. The U.S. changes have sparked a global deregulatory race as other countries worry their banks could be put at a disadvantage.

"That's a significant shift in competitiveness toward U.S. banks and frankly they've already been winning," he added. Bowman has said she wants to unveil ​the proposal by the end of March, and regulators have already submitted a plan to the administration for review.

Both rules, which are complex and lengthy, will be subject to industry feedback, and it is unclear when they may ultimately be finalized. The midterm elections could potentially complicate the process if Democrats, who generally oppose looser rules, gain more seats in Congress and could use their increased power to fight the changes, said the people.

Spokespeople for the Fed and FDIC declined to comment. The Office of the Comptroller of the Currency did not respond to a request for comment.