The Fed Simplifies Capital Rules, a Change Sought by Big Banks

The Federal Reserve on Wednesday moved to simplify capital rules, a long-expected change that banks have been pushing for — and one that sharply divided central bank officials.

The Fed has been in the process of overhauling its approach to capital rules for nearly two years. From the outset, the changes sought to combine capital requirements determined by stress tests — hypothetical exercises that check on how much money a bank would need on hand to keep lending and manage losses in times of financial stress — and a separate set of requirements.

The idea was to make capital rules for banks, cobbled together in the aftermath of the financial crisis, less redundant and more straightforward.

But banks pushed back on the Fed’s initial proposal for the combined standard, which the Fed calls the stress capital buffer — asking for an even more streamlined approach. Randal K. Quarles, the central bank’s vice chair for supervision and regulation, laid out a set of changes in 2019 that responded to those concerns.

His suggestions ramped up the tension in the debate over the Fed’s bank regulation under the Trump administration. Mr. Quarles, who was appointed by Mr. Trump, has been tinkering around the edges to make the rules that govern America’s largest banks easier to comply with and more predictable.

Lael Brainard, the last remaining Fed governor chosen by President Barack Obama, has pushed back on those attempts to make regulation less onerous. She has regularly warned against chipping away at rules meant to prevent the kind of risk-taking that exacerbated the financial crisis.

U.S. banks have been profitable, and Fed staff and officials have recently flagged that several of the biggest ones are planning on increasing dividends and lowering the amount of capital they hold.

“Today’s rule gives a green light for large banks to reduce their capital buffers materially, at a time when payouts have already exceeded earnings for several years on average,” Ms. Brainard said in a statement released alongside the changes that were announced on Wednesday.

Ms. Brainard dissented against the new rule. And she and Mr. Quarles laid out drastically different estimates of what they might mean for bank capital requirements. She suggested that they would let the biggest and most systemic institutions, like Goldman Sachs and JPMorgan Chase, off the hook. Mr. Quarles implied that those banks would face more stringent standards.

Ms. Brainard said that, taken together, the changes could reduce what the Fed calls common-equity tier one capital — things like common stock and cash — at the eight largest U.S. banks by $40 billion, or 5 percent, as of current data.

But both Fed staff and Mr. Quarles emphasized a different data point: capital over the course of several years, from weak business conditions to strong ones.

The rule will cause an increase “as measured through the cycle” in common equity capital of about $46 billion at the eight largest U.S. banks, Mr. Quarles said.

“Banks also keep certain voluntary buffers above our required minimums, and those buffers will vary somewhat from time to time — nothing in the S.C.B. rule adopted today gives banks an incentive to reduce those buffers,” he said.

Fed staff members came up with Mr. Quarles’s number, though they noted that the effect over those years ranged from a reduction of $6 billion in 2019 to an increase of $84 billion.

The discrepancy in the estimates owes partly to the time frame being analyzed — several years versus just 2019 — but also partly to assumptions. The staff make no effort to guess what banks would do with the capital buffers they hang onto voluntarily under the new rules. Ms. Brainard’s estimates assume that with more certainty, banks will reduce that optional layer of capital, using it for things like dividends.

Not all of the tweaks Mr. Quarles suggested last year in response to bank complaints were adopted, but at least one made it into the final version: the new stress capital buffer drops a leverage requirement.

Mr. Quarles has said the move will fix a glitch in the tests that could have encouraged excess risk-taking, but Ms. Brainard said it was part of the change that could free up capital for big banks.

The old rule also required banks to hang on to the cash they would need to pay out nine quarters of distributions to shareholders. The revised version requires them to fund only four quarters of dividends. Mr. Quarles had suggested dropping even that — a hotly debated proposal that was not approved.

The 2020 stress test results will be released at the end of June, the Fed said.

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