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Regulators to face tough questions about bank capital rules as pushback intensifies

A debate in Washington about tougher capital requirements for big banks is intensifying as the architects of those new rules prepare to testify before Congress this week.

Federal Reserve Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, and acting OCC Comptroller Michael Hsu are expected to face tough questions today and tomorrow from mostly Republican members who argue that bigger bank capital buffers proposed by these regulators would curb lending and hurt the economy.

One prominent Republican who opposes the rules as written is Senate banking committee ranking member Tim Scott (R-S.C.). On Sunday, Scott sent a letter to the Fed, FDIC, and OCC asking them to withdraw the plan they first proposed last July.

Ranking Member Tim Scott (R-SC) asks questions as Federal Reserve Board Chairman Jerome Powell testifies before the Senate Banking Housing and Urban Affairs Committee hearing on
Senate banking committee ranking member Tim Scott (R-S.C.). (Julia Nikhinson/REUTERS) (Julia Nikhinson / reuters)

The Nov. 12 letter, signed by 38 Senate Republicans, maintains that the initial proposal didn’t offer data to justify its analysis and will ultimately raise the costs of credit for millions of Americans.

"This would create severe, adverse impacts on the entire US economy, from everyday American consumers to the small businesses that are the backbone of our economy," Scott said in his letter.

Barr, according to prepared remarks for his testimony today before the Senate banking committee, plans to argue that the banking system is "sound and resilient" while defending the need for one of the most sweeping overhauls of bank regulation since the 2008 financial crisis.

Keeping banks resilient, he said in his prepared remarks, "requires continued attention to address identified vulnerabilities and vigilance to changing conditions."

Federal Reserve Board Vice Chair for Supervision, Michael Barr, testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing in the wake of recent bank failures, on Capitol Hill in Washington, U.S., May 18, 2023. REUTERS/Evelyn Hockstein
Federal Reserve Board Vice Chair for Supervision Michael Barr. (Evelyn Hockstein/REUTERS) (Evelyn Hockstein / reuters)

He also intends to acknowledge some criticisms of the capital-buffer plan first proposed by regulators last July, noting that regulators recently extended a period of public comment to Jan. 16 so that all parties would have enough time to provide feedback.

"We are interested in public input," he expects to tell the committee, according to his prepared remarks.

'Stop the squeeze'

This week’s clash in Washington follows several months of campaigning by banks and lobbyists to either stop the proposal from moving ahead or influence its final version, a pushback that included a TV commercial during a football game and a print ad from Goldman Sachs arguing the rules "will hurt small businesses."

"It’s time to stop the squeeze," the Goldman ad reads.

Industry lobbyist Financial Services Forum launched new national TV ads Tuesday that claim "this capital regulation is another bill Americans can't afford." The group has argued the proposal would negatively impact housing finance and homeownership, particularly for low- and moderate-income borrowers and communities as well as Black and Hispanic borrowers.

"The capital requirements ... would affect the cost and availability of every financial product and service, such as consumer loans, small business loans, bond underwriting for state and local governments, and mutual funds offerings for retirees," Financial Services Forum CEO Kevin Fromer said.

One official with a major bank said the industry feels in the dark on the proposal and that the Fed won’t engage in direct dialogue with banks. That makes it hard, this person said, for the banks to know whether the rules achieve the right balance.

This person said the Fed will need to decide how much of a headache it wants this to be and how much leeway will be given to Barr.

When Barr and other US regulators unveiled their set of changes in July, they said banks affected by the new rules would see an aggregate 16% increase in their capital requirements.

They also said the increase would primarily affect the largest banks and that most have enough capital already to comply. Capital is the buffer banks have to hold to absorb future losses.

The rules immediately prompted an aggressive public reaction from the banking industry and some of its top executives.

In September JPMorgan Chase (JPM) CEO Jamie Dimon called the proposal "hugely disappointing," warning that it could push more lending into private credit markets and have "unintended consequences" for the US economy.

JPMorgan Chase CEO Jamie Dimon talks to reporters as he leaves the U.S. Capitol after an unannounced meeting with U.S. Senate Majority Leader Schumer that was reportedly about the possibility of the U.S. defaulting on its debt, outside the U.S. Capitol in Washington, U.S., May 17, 2023. REUTERS/Evelyn Hockstein
JPMorgan Chase CEO Jamie Dimon talks to reporters as he leaves the US Capitol in May. (Evelyn Hockstein/REUTERS) (Evelyn Hockstein / reuters)

"I would love to know what they really want to accomplish," Dimon said, referring to regulators behind the proposal.

Several bank trade groups also sent a letter to the Fed, the FDIC, and the OCC asking them to "re-propose" the rule, arguing that the initial proposal "relies on data and analyses that the agencies have not made available to the public."

Even Fed Chair Jay Powell has hinted that he has reservations about the capital proposal and its impact.

Barr and the FDIC's Martin Gruenberg, in their prepared testimonies before the Senate committee Tuesday, both list a series of specific technical concerns they say they have heard about their proposal. Both are also scheduled to testify before the House Financial Services Committee on Wednesday.

WASHINGTON, DC - MAY 18: Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg speaks during a hearing with the Senate Banking Committee on Capitol Hill on May 18, 2023 in Washington, DC. The committee held the hearing to continue their assessment of the effects of the recent failures of Silicon Valley Bank and Signature Bank and the financial future for Americans. (Photo by Anna Moneymaker/Getty Images)
Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg. (Anna Moneymaker/Getty Images) (Anna Moneymaker via Getty Images)

Barr cited "concerns that the proposed risk-based capital treatment for mortgage lending, tax credit investments, trading activities, and operational risk might overestimate the risk of these activities."

Gruenberg echoed those observations, saying, "We have heard concerns related to the proposed treatment for residential mortgage exposures, certain tax credit equity investments, trading activities, and banking activities that generate large amounts of fee-based revenue."

"The feedback to-date has been extremely helpful," he added, "and the FDIC looks forward to receiving additional comments and feedback."

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