The US Federal Reserve is considering a rule change that would be just what the country’s largest banks have been beseeching regulatory agencies for and that could save them (collectively) billions of dollars in capital, according to Reuters’ discussions with four people having knowledge of the matter.

At issue: The Basel III Endgame, as it’s sometimes called – the methodology around how the central bank calculates an extra layer of capital it imposes on US global systemically important banks (GSIBs), known as the “GSIB surcharge” – which it introduced in 2015 to boost their safety and soundness.

The Basel III Endgame proposals call for an aggregate 16% increase in capital at GSIBs (so those with $100 billion or more in total assets), with the exact percentage varying across banks based on their activities and risk profiles. The new rules would also standardize the capital framework related to credit risk, market risk, operational risk, and financial derivative risk.

“Ironically, a proposal meant to mitigate risk will actually increase risk.”

Jamie Dimon, JPMorgan Chase chair and CEO

Banks would have a window between July 2025 and July 2028 to comply with the new framework.

These rules are part of a series aimed at keeping the banking industry safer after the 2008 Great Financial Crisis. They are intended to boost their resilience given the threat their possible failure poses to financial stability.

The newer proposed rules were also prompted by the March 2023 regional banking crisis set off by the collapse of Silicon Valley Bank and First Republic Bank – and the bailout of them that occurred mainly at taxpayer expense.

Pushback from banks

The affected banks do not see a need for that extra capital, pointing out that they were not troubled by the March 2023 mini-banking crisis caused by several mid-sized banks in the United States. In fact, they salvaged some of those bank’s books of business in the aftermath. And they said such rules would limit the large banks’ capacity for mortgages, car loans, credit cards, and small-business loans – this having the a potential detrimental impact on the wider economy.

“Ironically, a proposal meant to mitigate risk will actually increase risk,” said Jamie Dimon, JPMorgan Chase chair and CEO in congressional testimony. He said Basel III Endgame will increase borrowing costs for governments and businesses, and that “regulators will be unable to see the next crisis brewing.” CEOs of other big banks echoed those sentiments in their testimonies.

Critics pointed to how the new rules will bring constraints on residential mortgage lending, saying that could make it at least a little more likely that banks will continue to exit from the residential mortgage space. 

New considerations by the Fed

The Fed is considering updating inputs it used in its 2015 calculation to adjust for economic growth and in turn more accurately reflect certain bank attributes, relative to the global economy, the people said. Those attributes, or “coefficients,” relate to a bank’s size, interconnectedness, complexity and cross-border activity. The central bank said that approach would improve the predictability of the scores and make it easier for banks to plan.

And updating those inputs or “coefficients” would reduce the banks’ systemic scores and resulting capital surcharge, said the people who declined to be identified discussing private regulatory issues.

Watch this space

Nothing is a given here at the moment, and banks should not alter their planning just yet. But the central bank’s willingness to review the issue is both interesting and promising for GSIBs and their years-long campaign to reduce the surcharges.

If the Fed were to change the coefficients, it likely would opt to re-propose the rule for additional public feedback, the sources said, which could delay a final decision by several months.

Together, the GSIBs held roughly $230bn of capital on account of the surcharge in the first quarter of 2024, according to Fed data, so even a small change could result in significant savings for some of the banks. A 0.5% surcharge, for example, equals more than $8bn each for JPMorgan and Bank of America, according to a Reuters calculation.

It’s also important to note that in his second day of testimony, Powell emphasized that the central bank does not have supremacy over the other banking agencies regarding their joint rulemaking.