US Regulators Propose 4.8% Capital Cut for Largest Banks

Regulators Propose 4.8% Capital Reduction for Largest Banks

Federal regulators have advanced a proposal to lower capital requirements for US banks, a move that would reduce the aggregate capital cushion for the country's largest financial institutions by 4.8%. The plan, introduced by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC), is designed to unlock capital for lending, dividends, and stock buybacks. According to a Fed memo, this would translate into a roughly $20 billion capital release for the largest banks.

The proposed rules would also lower capital requirements by 5.2% for midsize banks with assets between $100 billion and $700 billion, and by 7.8% for banks with less than $100 billion in assets. The new framework aims to replace complex compliance calculations with a single, streamlined method for measuring credit, market, and operational risks. The proposal is now open for a public comment period ending June 18.

Policy Reverses Stricter Biden-Era Proposal

The current plan marks a significant reversal from a stricter Basel III implementation floated under the Biden administration, which had initially called for capital hikes of up to 20% for major banks before being abandoned. The Federal Reserve's Board of Governors approved the new, more lenient proposals in a 6-1 vote, signaling a clear shift in regulatory posture. The lone dissenter was Fed Governor Michael Barr, the board's vice chair for supervision, who had championed the previous, tougher rules.

I fear that, if this much weaker version of Basel III is adopted in the U.S., it could trigger a race to the bottom on standards, harming the global financial system.

— Michael Barr, Fed Governor.

Powell Defends Recalibration as Healthy Practice

Fed Chair Jerome Powell defended the adjustment, stating it is a "healthy practice to reexamine rules over time." Proponents argue the changes better align capital requirements with actual risk. Fed Vice Chair for Supervision Michelle Bowman noted that over-calibration can push lending activities into the less-regulated non-bank sector, and these changes aim to keep such business within the regulated banking system. Despite the proposed reductions, officials emphasized that capital levels will remain robust, with the largest banks still holding over $800 billion in capital—more than double their pre-2008 financial crisis buffers.