Wall Street banks score win as Fed unveils plan to ease capital

By Pete Schroeder

WASHINGTON, March 12 (Reuters) - Big bank capital requirements will fall slightly under revised drafts of sweeping new rules, Federal Reserve Vice Chair for Supervision Michelle Bowman said on Thursday, in a major victory for Wall Street lenders that had faced double-digit hikes under a 2023 plan.

The widely expected changes are part of a broader capital overhaul that marks the culmination of a years-long effort by Wall Street banks to ease rules, ?introduced following the 2007-09 financial crisis, which they say are stymieing economic growth.?

Speaking at the Cato Institute in Washington, Bowman outlined the adjustments to the so-called Basel rules and GSIB surcharge,? which determine how much money banks must set aside to absorb potential losses. She said the adjustments would better calibrate requirements in line with actual risks.

The Fed will vote on the proposal at a board meeting next week, the central bank announced after her speech.

Echoing industry arguments, she added that a steady increase in industry-wide capital levels in recent years has been misguided and harmful, although critics warned that the changes could weaken the financial system just as risks are rising.

"When capital requirements become excessive, they impair the banking system's fundamental function of providing credit to the real economy," said Bowman, who was appointed to the supervision role last year by Republican President Donald Trump.?

CAPITAL TO FALL BY 'SMALL AMOUNT'

Banking regulators are also easing a related leverage ratio, and the Fed is making its annual bank stress tests -- which set some capital levels -- more transparent.

In aggregate, the "sensible" changes will lower large bank capital requirements a "small amount" in line with 2019 levels, said Bowman.?

A Morgan Stanley research note earlier this week said large banks currently have over $175 billion in excess capital, and clarity on the rules could allow them to begin deploying that cash via lending and share buybacks.

That is a dramatic turnaround for the industry, which faced an increase of roughly 19% when the proposal was first unveiled in 2023 by Bowman's Democratic predecessor, Michael Barr, sparking ?an unprecedented industry pushback.?

Major bank groups that have led the fight, including the Bank Policy Institute and Financial Services Forum, celebrated Bowman's plan, while flagging that they would need to see the detailed draft before fully understanding its potential impact.

"The capital proposal outlined today suggests a welcome focus on risk-sensitivity and a comprehensive view, taking into?account the cumulative effects of all capital requirements. As with previous proposals, the details will matter."

CRITICS WARN AGAINST WEAKENING SYSTEM

Critics, including Democratic Senator Elizabeth Warren - who helped shape post-crisis rules - say the changes will weaken financial system safeguards at a time when geopolitical shocks sparked by the Iran conflict and deteriorating private credit conditions are rattling markets.

The Basel plan would create a "weak rule that fails to address the severe flaws in the capital framework that were never fixed after the 2008 financial crisis, leaving our entire economy at risk," Warren, who is the leading Democrat on the Senate Banking Committee, said in a statement.

Bowman said she hopes to finalize the changes quickly. Both rules, however, are complex and lengthy, and will be subject to 90 days of industry and public feedback, suggesting it could still take until the end of the year to complete them.

(Reporting by Pete Schroeder in Washington; Editing by Michelle Price, Nick Zieminski, Matthew Lewis and Andrea Ricci )