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US banks say regulators broke law as fight over proposed capital rules escalates

Published 09/12/2023, 10:27 AM
Updated 09/12/2023, 07:01 PM

By Pete Schroeder

WASHINGTON (Reuters) - U.S. bank groups on Tuesday accused the Federal Reserve and other regulators of violating federal laws with a sweeping proposal to raise capital requirements, escalating an assault on the draft rules that were also blasted by bank executives.

In a public letter to the agencies, the groups representing JPMorgan Chase (NYSE:JPM), Goldman Sachs, Morgan Stanley and Citigroup (NYSE:C), among other lenders, said the proposal unveiled in July violates the Administrative Procedure Act (APA) because it lacked sufficient public data and analysis.

The APA sets certain requirements for agencies when proposing new rules, including economic analysis. The groups argued that banks cannot properly respond to the proposal, which would require lenders to hold more cash to absorb losses, without that analysis. They said the agencies should freeze all work on the rules until they are properly re-proposed.

The Fed drafted the rules with the Federal Deposit Insurance Corp (FDIC) and Office of the Comptroller of the Currency (OCC). The Fed and OCC declined comment, while the FDIC did not immediately respond to a request for comment.

The "Basel Endgame" proposal implements international capital standards agreed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis. It overhauls how banks gauge their level of risk, and in turn how much reserves they must keep as a cushion against losses.

The letter marks the latest in an unusually aggressive industry effort to water down the proposal and lays the groundwork for a possible legal challenge.

CONGRESSIONAL HEARING

Banks often complain that regulators do not provide sufficient analysis, but the industry is taking an aggressive stance this time due to the magnitude of the proposal, according to a person familiar with the letter. The U.S. central bank has estimated it will increase industry capital requirements by $170 billion.

Executives at the biggest U.S. banks also weighed in.

"We don't agree with this proposal, and so we're commenting," Goldman Sachs CEO David Solomon told Reuters in an interview on Tuesday. "These capital rules will have an impact on economic growth and that will affect large businesses and small businesses and their access to capital."

JPMorgan CEO Jamie Dimon launched a broadside against the proposal on Monday, saying it could prompt lenders to pull back and that regulators had acted with "lack of transparency" about the rationale for the changes.

Morgan Stanley's head of investment management, Dan Simkowitz, said the bank is "highly engaged" in the comment period, which runs through the end of November: "There are certain things which just don't make any sense."

While the draft rules were in train prior to the collapse of three banks earlier this year, that crisis underscored the need for more robust rules and larger capital cushions to guard against unforeseen risks, Fed and FDIC officials have said.

Even before the proposal was unveiled, banks pushed for concessions, Reuters reported in June, and have enlisted Republican allies in Congress to scrutinize the effort, according to several lobbyists. The House of Representatives Financial Services Committee will hold a hearing on the proposal on Thursday.

© Reuters. FILE PHOTO: Signs explaining Federal Deposit Insurance Corporation (FDIC) and other banking policies are shown on the counter of a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

The Bank Policy Institute, which represents larger banks and is one of the groups that signed the letter, launched an ad campaign this month warning the proposal could drive up borrowing costs for consumers and businesses, and urging Americans to complain to Congress.

The letter was also signed by officials representing the American Bankers Association, the Financial Services Forum, the Institute of International Bankers, and the Securities Industry and Financial Markets Association. It was also signed by the Chamber of Commerce, the biggest U.S. business lobby.

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