The Federal Reserve Board’s vice-chair of supervision, Michael Barr, on Tuesday, outlined proposed Basel regulations which, if approved, would roughly halve the additional capital that big banks would need to maintain to safeguard them in the event of financial crisis. The new plan requires banks to hold 9% of additional capital instead of 19% proposed in the initial plan.

Barr announced that regulators would resubmit diluted drafts of the global banks' capital regulation and the so-called Basel Endgame rule. This is a significant victory for Wall Street lenders who have been actively pushing for the amendments' weakening.

The modifications above are a part of the global regulatory framework known as the Basel III endgame, which aims to prevent a recurrence of the 2008 financial crisis. The changes relate to the capital surcharge for global systemically important banks (G-SIBs), including JPMorgan (JPM Quick QuoteJPM - Free Report) , Citigroup (C Quick QuoteC - Free Report) , Bank of America (BAC Quick QuoteBAC - Free Report) and Wells Fargo & Company (WFC Quick QuoteWFC - Free Report) . 

Barr stated that this is an interim step. The Fed, along with the Office of the Comptroller for the Currency and Federal Deposit Insurance Corporation (FDIC), "have not made final decisions on any aspect of the re-proposals.” 

Despite the toned-down version of capital regulations being a positive development for banks, it was overshadowed by weaker guidance provided by banks at the Barclays conference. Shares of JPM tanked 5.2%, C dropped 2.7%, WFC fell 1.2% and BAC declined marginally in yesterday’s trading session.

Fed’s Modification in Capital Level of Big Banks

Introduced in July 2023, the regulatory overhaul known as the Basel Endgame would have boosted capital requirements for the world’s largest banks by nearly 19%.

In line with the latest proposal, Barr said that the regulators have revamped the proposal and will resubmit it with a roughly 9% increase in capital requirements for big banks.

FITB & Other Mid-Size Banks Spared from Strict Capital Requirement

G-SIBs aren’t the only banks that would get off easier with the requirements proposed. 

The new plan exempts medium-sized banks (with between $100 billion and $250 billion in assets), like Fifth Third Bancorp (FITB Quick QuoteFITB - Free Report) , Huntington Bancshares and others, initially subject to stricter standards, from increased capital requirements. These banks will still be required to recognize unrealized gains and losses of their securities portfolios in regulatory capital.

Earlier, these mid-sized banks were included to make them resilient and better prepared for shocks like the crisis when massive deposit withdrawals led to the failures of Silicon Valley Bank, Signature Bank and First Republic last year.

For these banks, the impact of the re-proposal would mainly result from the inclusion of unrealized gains and losses on their securities in regulatory capital, estimated to be equivalent to a 3-4% increase in capital requirements over the long run. 

The smallest banks would only see their capital requirements increase by 0.5%.

Final Thoughts on Toned-Down Capital Requirements for Banks

The toned-down capital requirements will be beneficial for banks. This amount might be allocated to other initiatives or to increase lending activities.

Barr stated, “This process has led us to conclude that broad and material changes to the proposals are warranted.” He further added, “There are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance.”

The plan aims to strengthen supervision over lending and trading and increase safety. 

We will have to wait until the new proposal is finalized to see how these affect banks’ financials over time.