The Federal Reserve is considering modifying supplementary capital rules, with major US banks expected to "reduce burden" by tens of billions of dollars

According to the Zhitong Finance and Economics APP, informed sources revealed that the Federal Reserve is considering revising rules that could save a total of tens of billions of dollars in capital for the eight largest banks in the United States, which could be a long-awaited victory for the banking industry.

The issue lies in how the Federal Reserve calculates the additional capital requirements imposed on U.S. Global Systemically Important Banks (GSIBs), known as the "GSIB surcharge." This additional capital requirement was introduced by the Federal Reserve in 2015 to enhance the safety and soundness of these banks.

Informed sources stated that the Federal Reserve is considering updating the calculation method established in 2015 to adjust for economic growth, in order to more accurately reflect the banks' relative size to the global economy.

The sources mentioned that updating the "coefficients" would lower the banks' systemic scores and the resulting additional capital costs.

The discussions at the Federal Reserve are ongoing, and no decisions have been made yet.

However, the Federal Reserve's willingness to reconsider this issue signals significant progress for large U.S. banks in seeking to reduce additional capital requirements.

The amount of capital that eight banks, including JPMorgan Chase (JPM.US), Citigroup (C.US), and Bank of America (BAC.US), can save will depend on various factors, including their business models.

According to Federal Reserve data, in the first quarter of 2024, U.S. GSIBs collectively held around $230 billion in additional capital, indicating that even minor changes could save a significant amount of funds for some banks.

According to Reuters' calculations, a 0.5% surcharge for JPMorgan Chase and Bank of America is equivalent to over $8 billion. The banks stated that they could reinject this cash into the economy through lending.

U.S. Global Systemically Important Banks also include Wells Fargo (WFC.US), Goldman Sachs (GS.US), Morgan Stanley (MS.US), Bank of New York Mellon (BK.US), and State Street (STT.US).

Battle of Basel

According to informed sources and other industry insiders, Federal Reserve officials have long been reluctant to reconsider these coefficients, fearing it would be seen as providing assistance to a few large banks.

However, last year, the Federal Reserve, along with two other U.S. regulatory agencies, announced the "Basel endgame" proposal, which would increase the capital requirements for Global Systemically Important Banks and other large banks, sparking a debate. Federal Reserve officials argued that the plan would more accurately measure the risk of bank losses.

At the same time, the Federal Reserve proposed to make the GSIB surcharge more sensitive to banks' risks, a change the Federal Reserve can make on its own.

Large banks are most affected by the Basel proposal, claiming that the agreement will restrict lending.

Reportedly, the Federal Reserve sympathizes with these complaints and is working to modify the proposal, but any concessions must be agreed upon by other regulatory agencies. However, other regulatory agencies are unwilling to make changes.

Some industry insiders believe that updating the coefficients for additional capital requirements is a way for the Federal Reserve to independently offset the impact of the Basel agreement on large banks However, another source familiar with the matter said that these two projects are not related, and Federal Reserve officials are independently pushing forward.

The source mentioned that if the Federal Reserve wants to change the coefficient, it may choose to reintroduce the rules and seek more public feedback, which could delay the final decision by a few months