Fed Chair Calls for Unity Amid Capital Proposal Dispute

Fed Chair seeks unity recently convened a private meeting with some of the nation’s top banking executives, urging them to collaborate with the Fed to avoid an extended legal confrontation over the Biden administration’s key capital proposal. This move by Powell underscores his intent to rally the financial sector around a proposal designed to prevent another financial crisis similar to that of 2008.

A Gathering of Financial Powerhouses

The meeting, held on July 19 in Washington, D.C., featured key figures from the banking industry. Prominent attendees included Jamie Dimon of JPMorgan Chase & Co., Jane Fraser of Citigroup Inc., and Brian Moynihan of Bank of America Corp. Morgan Stanley’s Ted Pick also participated in the session. This event was part of a Financial Services Forum gathering. The forum represents the largest U.S. banks and serves as a trade group.

The July 19 meeting showcased major banking leaders, emphasizing its importance as a key industry forum, according to wsj subscription.

Public Input and Industry Collaboration

Powell assured bank leaders that the public could comment on major changes to the capital proposal. His goal was consensus among industry leaders and Fed governors. He stressed the importance of collaboration in advancing the proposal. This proposal has been under development for over a decade. It addresses the 2008 financial crisis but faces strong resistance from the banking industry.

The Basel III Endgame and Regulatory Concerns

The proposal, often referred to as the Basel III endgame, aims to increase the capital that banks must hold to cushion against financial shocks. The original draft, released in July 2023 by the Fed, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC), suggested a 16% increase in capital requirements. However, a subsequent revision circulated by the Fed proposed a potential increase as low as 5%.

This revision has raised concerns among some regulators and industry observers. Critics worry that the Fed may concede too much in its efforts to achieve consensus, thereby weakening the proposal’s effectiveness, particularly for major banks with significant trading operations.

Criticism from Legal and Regulatory Experts

Powell’s recent Capitol Hill testimony suggested that the final Basel III endgame rule should receive broad support, drawing criticism. Jeremy Kress, a former Fed bank-policy attorney, voiced concern about prioritizing consensus. He warned this could lead the Fed to yield to banking industry demands. Kress described this approach as a “risky standard” potentially undermining the regulatory framework.

Thomas Hoenig, former Federal Reserve Bank of Kansas City president, now a senior fellow at the Mercatus Center, shared these concerns. He emphasized that the Federal Reserve must establish sound banking policy, regardless of industry consensus. Hoenig stressed the importance of upholding the Fed’s statutory obligations.

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Fed’s Approach to Finalizing the Rule

During the Financial Services Forum meeting, Powell was asked if the Fed would act independently of other regulators in finalizing the proposal. Some attendees left with the impression that this could be a possibility. This reflects the complex dynamics as the Fed moves forward with the proposal.

Powell highlighted the need for the proposal to be comparable to similar initiatives in other major jurisdictions. He pointed to the European Union’s Basel initiative, which would result in a 10% overall capital increase, and the UK’s version, which would see an average rise of about 3%.

Legal Challenges on the Horizon

Fed chair seeks unity as the banks address their concerns now to avoid future legal challenges; the specter of litigation looms large. The Bank Policy Institute, along with other trade groups, has already indicated their readiness to challenge the proposal in court. These groups argue that the capital plan violates the Administrative Procedure Act, which governs regulatory processes.

Eugene Scalia, a corporate litigator for the Bank Policy Institute, emphasized rising legal challenges in today’s regulatory environment. Courts’ increasing receptiveness could hinder the Fed’s proposal implementation.

The Road Ahead for U.S. Banking Policy

The Federal Reserve faces a critical challenge in balancing strict capital requirements with industry concerns. This debate’s outcome will shape U.S. banking policy and financial stability. The future of the financial system hinges on these decisions. Regulatory choices will have lasting impacts on the industry’s trajectory.

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