Banks accuse regulators of violating federal laws
U.S. bank groups on Tuesday accused the Federal Reserve and other regulators of violating federal laws with a sweeping proposal to raise capital requirements, escalating an assault on the draft rules which bankers say will hurt the economy. The groups, representing JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup, among other lenders, said the proposal unveiled in July violates the Administrative Procedure Act (APA) because it lacked sufficient public data and analysis. The APA sets certain requirements for agencies when proposing new rules, including economic analysis.
The groups argued that banks cannot properly respond to the proposal, which would require lenders to hold more cash to absorb losses, without that analysis. They said the agencies should freeze all work on the rules until they are properly re-proposed. The Fed drafted the rules with the Federal Deposit Insurance Corp (FDIC) and Office of the Comptroller of the Currency (OCC). The Fed and OCC declined to comment, while the FDIC did not immediately respond to a request for comment.
Proposal implements international standards
The proposal, known as the “Basel Endgame”, implements international capital standards agreed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis. It overhauls how banks gauge their level of risk, and in turn how much reserves they must keep as a cushion against losses. The U.S. central bank has estimated it will increase industry capital requirements by $170 billion.
The proposal aims to address some of the shortcomings of the current framework, such as inconsistencies in how banks measure risk-weighted assets, excessive reliance on internal models, and insufficient sensitivity to market risk. The proposal also introduces a new leverage ratio requirement for global systemically important banks (G-SIBs), which would limit their ability to use borrowed funds to boost returns.
Bank executives blast proposal as harmful
The letter marks the latest in an unusually aggressive industry effort to water down the proposal and lays the groundwork for a possible legal challenge. Bank executives have also publicly criticized the proposal, saying it would constrain lending and hamper economic growth.
“We don’t agree with this proposal, and so we’re commenting,” Goldman Sachs CEO David Solomon told Reuters in an interview on Tuesday. “These capital rules will have an impact on economic growth and that will affect large businesses and small businesses and their access to capital.”
JPMorgan CEO Jamie Dimon launched a broadside against the proposal on Monday, saying it could prompt lenders to pull back and that regulators had acted with “lack of transparency” about the rationale for the changes. Morgan Stanley’s head of investment management, Dan Simkowitz, said the bank is “highly engaged” in the comment period, which runs through the end of November: “There are certain things which just don’t make any sense.”
Regulators defend proposal as necessary
While the draft rules were in train prior to the collapse of three banks earlier this year, that crisis underscored the need for more robust rules and larger capital cushions to guard against unforeseen risks, Fed and FDIC officials have said. They have also argued that the proposal is consistent with the Basel agreement and reflects the unique characteristics of the U.S. banking system.
Fed Vice Chair for Supervision Randal Quarles said in July that the proposal would enhance financial stability and promote a level playing field among banks across jurisdictions. He also said that most banks would not face significant increases in capital requirements under the proposal, and that those that do would have ample time to adjust.
FDIC Chair Jelena McWilliams said in August that the proposal would ensure that banks have enough capital to withstand stress scenarios and continue lending during downturns. She also said that the proposal would reduce regulatory burden for smaller banks by simplifying some of the calculations and reporting requirements.
Congress to hold hearing on proposal
The bank groups have also enlisted Republican allies in Congress to scrutinize the effort, according to several lobbyists. The House of Representatives Financial Services Committee will hold a hearing on the proposal on Thursday.
The committee’s ranking member Patrick McHenry said in a statement that he is concerned about the potential impact of the proposal on credit availability and economic growth. He also said that he wants more transparency from regulators on how they arrived at their estimates and assumptions.
The committee’s chair Maxine Waters said in a statement that she supports strong capital standards for banks and welcomes input from all stakeholders on how to implement them effectively. She also said that she expects regulators to explain how they balanced competing objectives and interests in developing their proposal.
