Banks are never fans of tougher regulation, but they really don’t like the overhaul of US capital rules proposed at the end of July by the Federal Reserve and other finance authorities. Lenders and their lobbyists have come out fighting.
It’s not just the potential costs or extra capital demands they hate: There is plenty of negotiating room around those. They also claim a lack of analytical justification for the changes, that some rules are incoherent and that regulators are overriding Congress.
The Fed’s vice-chair for supervision, Michael Barr, is going to be sucked into a deeply political battle over the rule changes, especially as they are due to be finalized in the middle of a presidential election year. Worse, at July’s vote two Fed board members sharply opposed the plan and even Chair Jerome Powell, appeared to express reservations, as the finance industry keenly highlights.
The headlines from the overhaul were that the biggest banks could see the amount of equity capital they need in their balance sheets rise by nearly 20%, while midsize banks could need 10% more. But JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon revealed last week that he expects to need 25% more capital, while David Solomon, Goldman Sachs Group Inc. CEO, forecast marginally more than that. Banks will make more detailed protests in letters to regulators due by November 30.
These are extremely unlikely to be the final numbers. Regulators’ demands often start high and settle for less. That would allow Barr to seem reasonable toward business interests while somewhat appeasing Democrats like Elizabeth Warren, a big voice on financial services. But even if banks had to hit those targets, they would have no trouble getting there: Bank of America Corp., which sees a 20% uplift as the worst likely outcome for itself, could add the capital it requires within two quarters without affecting its dividends.
European bank investors will struggle to feel much sympathy. While many lenders there struggle to beat their cost of capital, most big American banks produce good returns and hand out billions of dollars’ of share buybacks and dividends every year. And they too face rising capital demands: Barclays Plc, BNP Paribas SA and Deutsche Bank AG expect their requirements to grow by 5%-10% under UK and European versions of the rules.