By Jesse Hamilton
Last week, federal agencies rolled out plans for overhauling some of the most significant constraints imposed on banks after the 2008 financial crisis: capital requirements that are meant to make lenders better equipped to withstand losses, stress tests that assess firms ability to survive another economic calamity and restrictions on leverage.
On April 10, the Federal Reserve proposed making the stress tests less stressful, while tying capital demands much more closely to how banks perform in the annual exams. On April 11, the Fed and Office of the Comptroller of the Currency proposed easing limits on how much banks can rely on borrowed money by tweaking the leverage ratio rule, which is meant to prevent lenders from getting dangerously overextended.
Though compliance gurus are still poring over the details, the moves could aid Trumps goal of stoking lending by freeing up billions of dollars of capital that banks were forced to amass in the wake of the crisis. But the proposals also indicate that regulators overhaul of rules will be done with a scalpel, not a machete. That means much of the post-crisis framework is probably here for the long haul.
“There is not revolutionary change here,” said Michael Alix, a partner at PricewaterhouseCoopers and a former official at the Federal Reserve Bank of New York. “The Fed is saying capital levels are about right, and stress testing is here to stay.”
In the wake of the big news, the lenders army of Washington lobbyists have largely been silent, still trying to work out the answers to some key questions:
Who are the biggest winners?
Bank of New York Mellon Corp. and State Street Corp. could take the top prize. The custody banks, which are known for safeguarding assets rather than lending out money, could have their capital demands reduced by as much as a third. They are also poised to get further breaks in their leverage limits should Senate legislation revamping bank rules reach Trumps desk.
The Feds new approach to more closely align capital with the stress tests should be good news for regional banks like SunTrust Banks Inc. and PNC Financial Services Group Inc. Such lenders would still be subject to the exams, but would benefit from from slightly easier tests and also lower capital minimums.
Some of the early assessments from Wall Street banks indicate that it might be a different story for them.
“Its fair to say that our minimum level of capital including a management buffer would likely be higher under this proposal,” Marianne Lake, JPMorgan Chase & Co.s chief financial officer, said on an April 13 earnings call.
How much bank capital will be unlocked?
The Fed and OCC proposal to limit bank leverage is broadly good for the eight banking giants it affects, including JPMorgan, Goldman Sachs Group Inc. and Citigroup Inc. But how much capital it unshackles depends on a complicated array of factors.
Initially, the Fed estimates that the firms bank holding companies would have a negligible $400 million of newly freed capital to pay out to shareholders or to buy back stock. Still, that figure is dwarfed by the $121 billion in excess capital the Fed says its proposal might trigger at the companies chief banking subsidiaries.
On the other adjustment — the Feds revision of stress tests and risk-based capital — the agency estimated that it would cut the total cushion that the industry has to maintain by $30 billion. However, the regulator said capital demands for the biggest banks might actually rise by as much as $50 billion. Goldman Sachs analysts have a rosier outlook, projecting in a report last week that easing stress-test assumptions could free up more than $50 billion in capital.
If billions in capital is redeployed, where will it go?
Bank investors salivating over big dividend hikes might be disappointed. The $121 billion the Fed said could be redeployed by its leverage-ratio proposal comes with a catch. Banks cant just hand it out to their shareholders because the firms holding companies are already under specific limits on how much they can disburse.
What the bank subsidiaries could definitely do with the freed capital is send it to their parent companies. From there, it can be deployed to nonbank units such as broker-dealers or foreign banking arms.
Does this mean post-crisis rules have been ripped to shreds?
On the contrary.
While the changes have been long-anticipated, they keep in place the oversight established after the crisis. The Feds stress tests, the hundreds of Dodd-Frank Act regulations implemented by federal agencies and the bulk of capital restrictions hatched at the Basel Committee on Banking Supervision are cemented in place.
Even with Republicans in control of the White House and Congress, the GOP hasnt made any traction on its most aggressive plans for eviscerating Dodd-Frank. The bipartisan bill that cleared the Senate in March helps smaller lenders but does little for Wall Street. Its now awaiting a response from the House.
There is more to come from regulators, assuming they live up to promises to ease restrictions such as Volcker Rule constraints on bank trading, Bank Secrecy Act enforcement pressures and some demands of the Community Reinvestment Act.
Will the regulators proposals make banks less safe?
Opinions are split.
The Federal Deposit Insurance Corp., which is still run by a Barack Obama appointee, refused to sign on to the Fed and OCCs leverage proposal.
“Strengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post-crisis reforms,” FDIC chief Martin Gruenberg said in a statement. This proposal, he said, dials back a limit that “served well” to curb excessive leverage.
Marcus Stanley, policy director at Americans for Financial Reform in Washington, accused the Fed and OCC of “caving in to the agenda of too-big-to-fail banks” to make changes he called “irresponsible.”
But in the Feds proposal on stress tests, it aimed to make sure that Wall Street capital requirements are unchanged or even higher. Fed Vice Chairman for Supervision Randal Quarles said the effort “simplifies our capital regime while maintaining its strength.”
JPMorgans Lake said the proposed revision will “better reflect reality.”