US banking capital reform has entered a critical phase. Although senior Federal Reserve officials have signaled clear support for the new rules and urged reduced public pressure, large banks continue to push for further relaxation of capital requirements. According to informed sources, Federal Reserve Vice Chair for Supervision Michael Barr met with chief executives of major banks, including JPMorgan Chase (JPM.US) and Goldman Sachs (GS.US), in Washington in early April. He urged the industry to consider the impact of the new capital proposal from a holistic perspective rather than continuing to seek additional exemptions. The proposals are widely seen as beneficial for the banking industry, as they are expected to lower overall capital requirements. Sources indicated that some bank executives perceived from the meeting that the Fed wants the industry to focus more on "constructive feedback" in comments due by mid-June, rather than engaging in intense lobbying as before, as the capital proposals are not expected to undergo major revisions. Over the past year, US regulators have continued efforts to ease the bank regulatory framework, responding to long-standing Wall Street criticism that the rules are overly complex and burdensome. A package of measures led by Vice Chair Barr and announced in March includes reducing the additional capital requirements for US systemically important banks and adjusting capital rules related to the Basel Committee on Banking Supervision. The Federal Reserve stated that, when combined, these measures would result in a "modest decline" in capital requirements for some banks. This shift marks a stark contrast to 2023, when the banking industry united to oppose the "Basel III endgame" proposal that would have significantly raised capital requirements, ultimately preventing its implementation. However, even with the clear shift toward a more lenient regulatory direction, large banks are still seeking further concessions. JPMorgan CEO Jamie Dimon recently criticized the plan for unnecessarily tying up capital, while Citigroup CEO Jane Fraser said that although the proposal is an improvement, it "still does not go far enough." JPMorgan emphasized in its latest earnings call that despite the overall reduction in industry capital requirements, the bank itself may still need to hold approximately $20 billion in additional capital. Meanwhile, controversy over stress testing rules continues. Previously, the Bank Policy Institute and the American Bankers Association publicly criticized the assumptions used in stress tests as "excessively harsh and unrealistic." Although the Fed has proposed adjustments to the annual stress testing mechanism, allowing banks to know the testing criteria in advance, critics argue this effectively turns the test into an "open-book exam." Analysts note that Wall Street is not monolithic on this issue. Due to differing business structures across major banks, many institutions prefer to push for customized reforms that benefit their own balance sheets rather than maintaining a united front to seek industry-wide relief. Former Fed banking policy attorney Jeremy Kress suggested this creates a "prisoner's dilemma," where banks could unite to push for broader capital requirement reductions but risk delaying or even derailing the final rules by pursuing individual exemptions. Ian Katz, Managing Director at Washington research firm Capital Alpha, pointed out that there are also divisions among regulators. Some officials believe sufficient concessions have been made to the banking industry and worry that further fine-tuning could lead to endless demands from banks. As a regulator perceived as sympathetic to the banking industry, Vice Chair Barr is currently attempting to balance the interests of the industry, the public, US financial regulators, and international regulatory bodies. Since adjustments to US capital rules are linked to the coordination of global regulatory standards, international regulators are closely watching the final US proposal. Barr has stated his intention to complete the capital reform by the end of the year to free up capacity for addressing other potential financial risks.
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