Wall Street's bank capital victory in sight but hurdles remain

(Reuters) - Wall Street banks are set to score a win as President Donald Trump's regulators unveil softened new draft capital rules this week, but there could still be fresh technical and political challenges ahead for the contentious project.

Big bank capital requirements will fall slightly ‌under proposals federal regulators will release on Thursday, Federal Reserve Vice Chair for Supervision Michelle Bowman said last week, a stunning turnaround for an industry that had faced double-digit capital hikes under the original 2023 draft.

The revised "Basel" and "GSIB surcharge" proposals will rejig how lenders calculate funds they put aside to absorb potential losses. The overhaul follows a years-long Wall Street bank campaign to ease rules introduced after the 2008 financial crisis which they say are stifling the economy, although critics say the changes will weaken financial system safeguards just as geopolitical and private credit risks are surging.

While banks are edging closer to victory, it could still take the best part of a year to finalize the complex proposals as lenders pore over the fine print and regulators navigate potential complications, including a new Fed chair and White House review, ⁠said industry sources and analysts. Since some banks stand to gain more than others, there could also be fresh industry jostling for further adjustments, they said.

"You're going to get several hundred pages, possibly a thousand pages of documents," said Ian Katz, managing director at Capital Alpha Partners. "There's just going to be so much to go over, and some of it is highly technical."

Bowman said the agencies will move quickly, but Truist Securities analysts wrote last week the proposal is unlikely to be finalized until early 2027.

Spokespeople for the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency either declined comment, or did not respond to requests for comment.

SOME BIG UNKNOWNS REMAIN

The Basel rule implements an international capital standard, focusing on how banks allocate funds to credit risk, market risk and operational risk. Bowman's Democratic predecessor Michael Barr unveiled the first draft in July 2023, arguing Silicon Valley Bank's collapse months earlier justified capital hikes, which some big banks said would have been as much as 20%. It affected more than 30 banks with more than $100 billion in assets.

Arguing they were already well-capitalized, lenders threatened to sue and launched an unprecedented campaign to weaken the rule, winning over many lawmakers and sowing division among the regulators. That dragged the project into the Trump administration, ‌which has mostly ⁠sided with the industry.

Bowman said last week the changes would better calibrate requirements in line with actual risks.

The new Basel draft nixes several measures banks hated, including a requirement to comply with the stricter of two methods for measuring their risk capital, which penalized the Wall Street trading giants. It will also go easier on fee-based businesses, like credit cards, that would have been hit by strict new operational risk requirements.

But banks are still looking for clarity on other hot-button issues. Those include the extent to which they can use internal models for assessing market risks, as opposed to a model prescribed by regulators, and how much capital they must hold against securities that are not publicly listed.

The Fed ⁠also plans to tweak the GSIB surcharge levied on the eight riskiest global U.S. banks by updating some economic inputs and adjusting how short-term funding risk is calculated.

Lenders with the highest GSIB surcharges including JPMorgan (JPM.N), Bank of America (BAC.N), Citigroup (C.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N), could benefit, other analysts wrote, but industry officials warned there could be sizeable differences among the firms.

Brian Gardner, chief Washington policy strategist at Stifel, said the industry response will depend on how the proposal affects specific businesses. "Not ⁠all large banks are the same," he added.

Spokespeople for the banks either declined to comment or did not immediately respond to requests for comment.

POLITICAL CHALLENGES?

Banks will have 90 days to provide feedback to the agencies, which will have to jointly agree any further changes. At the Fed, that requires a vote by its bipartisan board, whose Democratic members may threaten to dissent if they feel the ⁠final version is too weak, said industry sources.

It will also need the backing of Kevin Warsh, Trump's pick to replace Fed Chair Jerome Powell. Warsh has not taken a public stance on the capital rule changes, but generally favors a lighter touch. Under a 2025 Trump executive order, the final rule will then have to be vetted by the White House Budget Office, creating another potential complication.

Still, with banks and regulators on the same side this time around, Jeremy Kress, a University of Michigan professor, said it should still be "much easier" for regulators to reach the finish line.

Editing by Nick Zieminski