Janice R. Andrews
In a noteworthy development, major US banks have been successful in their efforts to get a controversial rule requiring larger reserves as insurance against possible future losses reexamined. This week marked the culmination of their efforts when FDIC Chair Martin Gruenberg and Federal Reserve Chair Jay Powell announced their plans to amend the regulation in response to growing pressure from a range of stakeholders, including community organizations, lenders, Republicans, and even some Democrats.
Speaking before Senate senators, Powell emphasized the impending changes by saying, “I expect there will be material and broad changes.” During talks with House legislators, he restated this position and emphasized the regulatory flexibility to re-propose the rule if it is seen essential. Similar to this, Gruenberg said that changes will probably be made in light of the substantial input he had received.
Since the financial crisis of 2008, one of the biggest regulatory changes in banking supervision has been the capital rule in issue. The introduction of this policy has raised concerns about anything from possible negative repercussions on the US economy to reduced mortgage availability for low-income households. This regulatory reevaluation represents a significant shift in Washington’s approach to financial regulation, marking a break from the strict control placed on banks during the crisis.
Bank of America bank analyst Ebrahim Poonawala sees this as a potentially significant event, indicating that the regulatory burden on large banks may have peaked. Still, not everyone is in agreement with regulatory laxity. Senator Elizabeth Warren blasted Powell, citing prior promises to strengthen oversight in the wake of mid-sized institution failures such as Silicon Valley Bank, for what she saw as a retreat from stricter capital regulations.
Powell supported the Fed’s position, emphasizing that the problems that led to Silicon Valley Bank’s failure are not the same as the Basel III capital guideline that is under investigation. He reiterated his commitment to the goals he had previously set forth and gave legislators assurances about continuing efforts to improve oversight that was customized for individual institutions.
The increased capital requirements that Fed Vice Chair Michael Barr suggested last summer are at the center of the controversy. The purpose of these regulations is to make banks more resilient to insolvency. Major banks are expected to have significant increases in capital and risk-weighted assets.
As a result, banks have launched a determined campaign to contest the new rules; several of them sent the Fed thorough objections before the comment period closed. Jeremy Barnum, the CFO of JPMorgan Chase, indicated the severity of the banking industry’s hostility by even raising the prospect of legal action if the standards stay the same.
If regulatory changes are not forthcoming, the Bank Policy Institute, which represents JPMorgan and other big banks, has apparently looked at legal options. Powell’s statements gave rise to confidence, according to Kevin Fromer, President and CEO of the Financial Services Forum, who also emphasized the need for comprehensive measures to minimize possible harm to the US economy and people.
The continuous discussion about regulation changes emphasizes how closely financial firms, regulators, and legislators interact. The final balance between stability and flexibility in financial regulation is still a topic of intense examination and discussion within Washington’s corridors of power, even as major banks exercise their influence over regulatory decisions.
