The Federal Reserve is considering a rule change that could free up billions of dollars in capital for the nation’s eight largest banks, in a potential long-awaited win for the industry, according to four people familiar with the matter.
The question at hand is how the central bank calculates an additional layer of capital it imposes on U.S. systemically important banks, known as the “GSIB surcharge,” which it introduced in 2015 to bolster their safety and soundness.
The Fed is considering updating the inputs it uses in the calculation, which it set in 2015, to adjust for economic growth and thus more accurately reflect the size of banks relative to the global economy, the people said.
Updating these inputs, or “transactions,” would lower banks’ regulatory scores and resulting capital charges, said the people, who declined to be identified discussing private regulatory issues.
The two sources said the Fed’s deliberations, which Reuters is reporting for the first time, are still ongoing and no decisions have been made yet.
But the central bank’s willingness to review the issue represents a major advance in the years-long campaign by big commercial banks to cut the surcharges, which have had little support until recently. It also shows how the broader battle over capital rules is creating new opportunities for banks to press for other regulatory concessions they have long sought.
The potential capital savings for the eight banks, which include JPMorgan, Citigroup and Bank of America, will depend on a number of factors, including their business models.
According to Federal Reserve data, U.S. global investment banks collectively held about $230 billion in capital due to additional charges in the first quarter of 2024, suggesting that even a small change could result in significant savings for some banks.
For example, the 0.5% surcharge is worth more than $8 billion each to JPMorgan and Bank of America, according to Reuters calculations. That’s the cash banks say they can pump back into the economy through lending.
Spokespeople for the global investment banks, which also include Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York and State Street, declined to comment or did not immediately respond to requests for comment.
These additional charges were imposed as a result of the global financial crisis in 2009, and are intended to enhance the resilience of global commercial banks in the face of the threat they pose to financial stability.
In adopting the rule, the Fed said it was stabilizing coefficients, which relate to a bank’s size, interconnectedness, complexity and cross-border activity, using data from 2012-13.
The central bank said the approach would improve predictability and make it easier for banks to plan, but it would review the framework periodically.
Global banks say the review is long overdue. Because banks tend to grow in line with the economy, using an outdated methodology makes them appear larger relative to the global economy than they actually are, they argue.
In a public letter to the Fed in January, JPMorgan Chase wrote: “Global investment banks in the United States hold more than $59 billion of their own capital reserves that are solely attributable to overall economic growth.”
The two sources said the Fed is considering updating its rates to take into account global economic growth in recent years, although Reuters was unable to confirm exactly how it would do so.
Battle of Basel
Fed officials have long been reluctant to reconsider the transactions, fearing they would be seen as giving a handful of megabanks a pass, according to the sources and other industry officials.
But the central bank sparked controversy last year when it, along with two other regulators, unveiled a “Basel Endgame” proposal that would increase capital for large commercial banks and other big banks. Fed officials claimed the plan would more accurately measure the risk of bank losses.
Meanwhile, the Fed has proposed making surcharges on longer-term mortgages more sensitive to banks’ risk, a change it could make on its own.
The ECB has not discussed the transactions, and expects the changes to have little impact on the size of the capital surcharges banks charge, although some banks say they will increase them. But the proposals have sparked a huge lobbying effort in the industry, opening the door for big commercial banks to push back on the transactions again.
The biggest banks are the ones most affected by the Basel proposals, and have argued strongly that the proposal will force them to curb lending.
Reuters reported that the Federal Reserve is sympathetic to the complaints and is working to fix the proposal, but any concessions would have to be approved by other, less receptive, regulators.
Some industry officials have argued in private meetings with the Fed that updating the surcharge transactions is one way the Fed might use independently to offset the impact of the Basel increases on big banks.
The Fed may ease the burden on the largest banks if no deal is reached to ease it. [Basel] “By introducing reforms to the surcharges on the big banks at the same time, this could push the capital buffers of the largest banks into the 3% to 5% range,” TD Cowen analyst Jarrett Seeberg wrote in a note Tuesday in response to the Reuters report.
However, a fifth person familiar with the matter said the two projects were not related and that Fed officials were working on them independently.
If the Fed decides to change the transactions, it will likely choose to re-propose the rule for additional public comment, which could delay a final decision for months, the sources said.
—Pete Schroeder, Reuters
Paritosh Bansal, Saeed Azhar, Tatiana Bautzer and Nupur Anand contributed to this report.
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