Fed Revises Bank Capital Rules, Draws Brainard Rebuke Over Risks

(Bloomberg) -- The Federal Reserve issued a landmark overhaul of Wall Street capital rules Wednesday, drawing a rebuke from one of the board’s governors who warned that the change could let banks dial back buffers meant to protect them from losses.

The “stress capital buffer” rule is meant to ease a burden that has plagued lenders since the Fed instituted stress tests after the 2008 financial crisis.

The change bridges a longstanding gap between the pressures of the stress test and the demands of post-crisis capital rules. Instead of having banks wrestle with two different regimes for determining how much financial cushion they need, the rule marries them by adding a new buffer to day-to-day capital requirements. The new buffer is based on banks’ hypothetical losses under scenarios presented in the stress tests.

Increasing Minimums?

It’s a mixed bag for JPMorgan Chase & Co., Citigroup Inc. and their peers.

The new rule may mean increased capital minimums -- with the Fed saying the eight U.S. megabanks would have faced a demand $46 billion higher on average across the previous seven years. But it also gives them further stress-test breaks by ditching a leverage limit previously used to evaluate their results, and it reduces assumptions for how much lenders would pay in dividends during a crisis.

Additionally, the rule cuts the number of capital measurements for banks, leaving large lenders “subject to a single, forward-looking and risk-sensitive capital framework,” the Fed said in a statement.

The changes “will strengthen capital while enhancing the transparency, simplicity and coherence of the regulatory capital and stress testing frameworks,” Randal Quarles, the Fed’s vice chairman for supervision, said in a statement.

Brainard Warning

Fed Governor Lael Brainard argues that the actual outcome will be a “green light for large banks to reduce their capital buffers materially.” She called it “imprudent” to ease capital at this stage in the economic cycle.

Quarles, appointed by President Donald Trump, has repeatedly said he wants to take a fresh look at rules passed after the 2008 financial crisis to ensure they aren’t too complicated, are working as intended and aren’t subjecting banks to undue regulatory burdens. His critics say such efforts are part of the Trump administration’s push to ease safeguards that were put in place to prevent another meltdown.

The Fed’s move could be especially welcome for the regional banks, because the agency estimates their capital demands will be lower. Institutions such as Truist Financial Corp. and Fifth Third Bancorp may be able to reduce their cushions by tens of billions of dollars.

Fed’s Focus

In this and other rules in recent years, the Fed has been focusing the most stringent restrictions on the largest banks. When the new buffer is in place, each bank will be looking at a day-to-day capital cushion that will include several components: longstanding base amounts, the new buffer based on stress-test performance, a counter-cyclical buffer (currently switched off), the equivalent of four quarters of dividends and an existing surcharge based on their systemic importance and complexity.

The new rule is set to go into effect in two months and will apply to the industry’s 2020 stress tests, the Fed said.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

©2020 Bloomberg L.P.