Fed mulls over redrafting bank capital rules as regulators clash

The Fed may be going back to the drawing board on proposed rules that would require banks to hold more capital, a move that could give the industry another chance to push back, five people familiar with the matter told Reuters.

Sources said the Fed is considering reproposing the so-called "Basel endgame" rules, which aim to update international bank capital standards in the wake of the 2008 financial crisis.

While the original proposal called for a 16% increase in capital requirements, the sources say regulators are discussing an increase as low as 5%.

Currently, regulatory agencies are reviewing draft changes to the proposal.

The next decision will be whether to accept and implement the current proposal or to repropose it, effectively reopening it for additional feedback from the industry and stakeholders.

Some say the discussion process has gone on long enough.

"Reproposing takes time," said Todd Phillips, a banking law professor at Georgia State University and former FDIC attorney. "Reproposing Basel now imperils it from ever being finalized."

Regulators clash over reproposal

The Federal Reserve's inclination to repropose the rules would put it at odds with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), according to Reuters sources.

Sources say the FDIC and OCC argue that there's no legal requirement to repropose the rules, and doing so could jeopardize the entire reform effort.

They fear that if the process is delayed and Republicans gain control of the agencies after the 2024 election, the new leadership may be less likely to implement stricter capital requirements.

Fed Chair Jerome Powell signaled earlier this year that the proposal was in for "broad and material changes," aiming to attract broader support from the central bank's board.

Fed Vice Chair for Supervision Michael Barr, seen as the architect of the original plan, echoed this sentiment in May, saying "If a reproposal ends up being appropriate, we'll do that."

Two Republican-appointed Fed governors have warned that the initial version could raise lending costs, impact the economy, and put U.S. banks at a disadvantage compared to international competitors.

Wall Street wants more say

The banking industry's opposition to the original Basel Endgame rules has been so fierce that some Wall Street banks have even threatened legal action if the regulators do not reissue the proposal.

They allege that the agencies violated federal law by failing to adequately justify the new rules and provide sufficient time for public input.

The United States is not the only country wrestling with what their Basel reforms will look like. The European Union said on Tuesday it will delay a key element of their Basel reforms to January 2026.

At present, it remains uncertain whether any official drafts of the proposal will be released before the upcoming presidential election. Both the FDIC and OCC have refrained from making any public statements on the matter.