Behind Wall Street’s big win with regulators
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Illustration: Eniola Odetunde/Axios
America's biggest banks are going to face tougher rules eventually, but not nearly as restrictive as regulators wanted.
Why it matters: After the biggest lobbying campaign in recent memory, legal threats, and surprising political allies, the industry defeated the initial slate of regulations known as Basel III Endgame.
What they're saying: "It's a nearly complete surrender to the banking industry," Jeremy Kress, a University of Michigan professor and former lawyer in the Fed's banking regulation group, said in an email.
- On almost every point in contention, "the Fed has capitulated to the banks," Kress said.
The big picture: The first proposal landed when the collapse of Silicon Valley Bank and other regionals was still fresh. Officials at the Fed, OCC and FDIC said the crisis proved the industry needed stricter regulations.
- But even the Fed's Michael Barr, the face of the new regulations, admits that moment has passed — and rules made against that backdrop now look too "conservative."
- "I have found on a personal level that life gives you ample opportunity to learn and re-learn the lesson of humility," Barr, the Fed's vice chair for supervision, said Tuesday.
By the numbers: The crux of the proposal deals with capital requirements — the risk-weighted assets banks need to cover unexpected loan losses.
- Regulators first pitched an increase of about 20%. Now they propose an increase of about 9%.
- Smaller banks (those with over $100 billion but less than $250 billion in assets) are now mostly exempt from any new rules — an about-face from earlier inclusion.
- Those banks will still have to account for unrealized losses on their balance sheet — the issue that led to SVB's downfall.
Key to Wall Street's pushback is their assertion that the industry has fared well — and has even been a source of strength — in the years following the 2008 financial crisis.
- This was the message in the "attack ads" that ran during NFL games, a massive but unusual audience for wonky bank proposals. If you don't watch sports, the ads may have reached you elsewhere: billboards, podcasts, news publications (including Axios).
- The ads warned that raising capital requirements would push banks to pull back on lending, harming the economy — or divert more lending into the less-regulated shadow banking system.
- Meanwhile, the Bank Policy Institute threatened the banks would take the extreme step to sue their regulator over the proposed rules, and hired powerful lawyer Eugene Scalia to lead any such charge.
Zoom in: Housing advocates and some Democratic senators were concerned the proposal would lead to less (or more expensive) lending to low and middle-income communities.
- Initially the rule said banks would have to hold more capital against loans considered especially risky, like those with less than a 20% down payment. That provision is dead.
- Barr admitted bank regulators did not adequately balance the benefits and costs of hiking capital requirements in last year's proposal.
- And he emphasized that officials spoke with "a wide range of stakeholders" while reworking the proposal — including the banks.
The intrigue: If the banks won, you wouldn't know it from the tone of the industry's public statements.
- The American Bankers Association said the revisions are welcome, but "any increase in capital requirements will still carry a cost for the economy."
The bottom line: The proposal will open up another round of public comments from the industry, meaning any final rule could be further revised — or, some warn, watered down. And it will be years yet before the regulations take effect.
