U.S. regulators will not be able to complete the controversial bank capital increase before the presidential election in November, leaving in doubt whether these and other proposed tough rules will be finalized for Wall Street banks, five people familiar with the matter said.
The so-called Basel III Endgame rules overhaul how banks with more than $100 billion in assets manage their capital, potentially limiting their lending and trading activities. Banks say the extra capital is unnecessary and will hurt the economy, and have lobbied aggressively to defeat Basel.
The outcome of this fight will depend on the November 5 election.
Democratic presidential candidate Vice President Kamala Harris has called for tighter banking regulations. But if Republican nominee Donald Trump wins, his administration is expected to eliminate or significantly weaken the new rules, the sources said. Mr. Trump has promised to cut red tape.
The two candidates are engaged in a close race, although Ms. Harris leads in some key states.
Regulators have been debating for months whether to reissue the Basel draft and allow banks to have their say, Reuters reported in June.
Industry leaders widely expect agencies to re-propose the rule after Federal Reserve Chairman Jerome Powell told Congress last month that it was “essential” to do so as major changes had been made. But it is unclear how the Fed will persuade other agencies, which want to finalize the rule before the election, to support the plan, the sources said.
Even if the agencies reach an agreement next month at the earliest, they are likely to give banks at least 60 days to provide feedback, which is normal for complex rules, the sources said. It would then be nearly impossible for officials to absorb the feedback and come up with a final draft before a new US administration takes office in January 2025, the sources said.
This schedule, which had not previously been reported, jeopardizes the Basel rules and two other debt and liquidity rules for large banks that cannot be implemented until the Basel draft is in good shape and the staff working there will not be released, said the people concerned.
Combined, these rules could require banks to hold more than $200 billion in additional capital and debt, according to regulators’ estimates, meaning significant or indefinite delays could be extremely costly to the industry.
Some progressives who favor tougher rules fear that the battle over Basel, in which banks have spent millions of dollars on public campaigns, will ultimately block the sweeping regulatory overhaul they had hoped for under Democratic leadership, despite last year’s banking crash, which highlighted the risks in the system.
“They were too optimistic about how easy it would be to implement the end of Basel III. When it turned out it wasn’t going to be that easy, it sucked out all the oxygen,” he said, Professor Jeremy Kress at University of Michigan, citing the agencies.
Spokesmen for the Fed, the Office of the Controller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), which jointly write the rules, declined to comment. Spokesmen for Mr. Harris and Mr. Trump’s campaigns did not respond to requests for comment.
In a speech to Congress in July, Mr. Powell said his goal was to get a good Basel system in place, “not to get it done quickly.”
FAILURE
Several Fed officials share Mr. Powell’s view that the new plan should be proposed again, two of the sources said. Some believe that would reduce the risk that Wall Street banks would file suit to defeat the final rule on the grounds that the agencies did not follow proper procedure, as Reuters previously reported.
Although the OCC and FDIC oppose a new proposal, it would be almost unprecedented for them to complete the project without the Fed.
“This is too big of a proposal, I think it would be malpractice for them to finalize it at this point,” said Michael Bright, chief executive of the Structured Finance Association, an industry group that is recommending certain changes to the project. “I don’t think it will happen before the election.
Mr. Trump would not be able to remove Fed regulator Michael Barr, but he could immediately replace acting Comptroller Michael Hsu and tilt the FDIC board, which votes on regulations, in favor of Republicans. These changes would quickly hand control of the bulk of the banking legislation agenda to Mr. Trump’s appointees.
Another key proposed rule at risk calls for large regional banks to issue up to $70 billion in new long-term debt to cushion potential losses.
Proposed a year ago, the rule is being delayed in part because the amount of debt banks will have to hold depends on how Basel measures their risks, two sources said. Work on the rule could begin once Basel’s final draft is “supported”, Mr Powell said in July.
The plan to introduce new liquidity rules for banks has also been delayed by the Basel accord, the two sources said.
Even if Ms. Harris wins, the expected nomination of Christy Goldsmith Romero to chair the FDIC could further delay the rules, and if the Senate switches to the Republican side, political pressure to weaken the rules could ‘intensify’.
“There are many things in the air,” said Mr. Bright.
