BREAKINGVIEWS-Fed's new rulebook makes banks bigger, not better

By Stephen Gandel

NEW YORK, March 19 (Reuters Breakingviews) - Wall Street has gotten what it wanted. Whether the Trump administration will is another matter. On Thursday, financial watchdogs unveiled a long-awaited, and long-contested, draft implementation of international regulations known as the Basel Accords, wrapped up in various other tweaks and changes. Unlike much-stricter rules proffered under President Joe Biden, the six biggest U.S. banks will be left holding as much as $210 billion in excess capital, based on their current balance sheets. Regulators hope the proposal will spark more lending, juicing the economy. It may well fall short.

When Basel’s so‑called endgame was first proposed three years ago, it would have raised the buffer of loss-absorbing capital that banks deemed as systemically important must hold by 19%. Now, that figure is poised to fall by about 5%. If finalized, it will successfully culminate an intense pressure campaign by the titans of American finance, including the likes of JPMorgan JPM.N boss Jamie Dimon.

The comparison is imperfect. Basel tweaks alone actually raise required capital buffers. It is only after adding in further changes to other areas that overall requirements fall. Some shifts are straightforward. For instance, risk weightings determine how much capital banks must hold against specific assets. For credit‑card loans, the current proposal would cut them by as much as 55%. Other relief comes through procedural switch-ups. In some cases, if a lender’s internal risk model differs from the Federal Reserve’s, the less-stringent one will now be used.

There are some negatives for Wall Street. Banks must, for the first time, hold capital to protect against day-to-day risks, like trading-desk losses or back-office goofs. Yet the net result is that banks will find it easier to get bigger. That’s exactly what happened after capital rules were eased during the first Trump administration, in 2018. Over the following four years, assets at the 25 biggest U.S. lenders rose twice as fast as before, according to Fed data. Loan growth, however, remained unchanged.

While the new framework should improve returns on products such as credit‑card loans — since they will require parking less protective capital that isn’t earning anything — it’s hard to compete with shareholders’ desire for immediate payouts from share repurchases or dividends. Which way Wall Street tends to lean is implicit in the declining intensity of lending operations: the big four consumer banks’ loan‑to‑deposit ratio has fallen to 56%, from 81% two decades ago. Capacity simply has not translated to activity.

If regulators really want credit to flow, a more direct approach would be to penalize banks that slow lending, perhaps setting a threshold of loans to deposits. That could adversely affect financial stability, but simply using carrots may not be enough without a hefty stick.

Follow Stephen Gandel on LinkedIn and X.

CONTEXT NEWS

The Federal Reserve on March 19 released its proposal to implement the so-called Basel III Endgame, the long-delayed final phase of higher capital rules put in place after the 2008 financial crisis. The proposal is subject to a 90-day comment period.