Powell's Secret Summit with Bank CEOs Sparks Speculation on Eased Capital Rules

On August 16, Eastern Time, it was revealed that Federal Reserve Chair Jerome Powell attended a closed-door meeting with CEOs of major U.S. banks, urging them to cooperate with the Fed to avoid protracted legal battles over the Biden administration's signature capital plan. This development was reported by insiders. Previously, U.S. regulators introduced a proposal in July last year demanding banks with assets exceeding $100 billion to increase their capital by approximately 16%. However, recent reports suggest that the Fed presented a revised plan to other regulatory bodies, potentially reducing the capital increase to as low as 5%. Analysts state that Powell's mention of the revised plan in the closed-door meeting is a significant step, suggesting that a final version of the "American version of Basel III" might not be finalized this year. The eventual outcome of the new regulations and their impacts will likely depend on the results of the upcoming U.S. elections, indicating considerable uncertainty within the U.S. regulatory framework concerning bank capital reforms. Insiders disclosed that Powell informed prominent CEOs, including JPMorgan's Jamie Dimon and Citigroup's Jane Fraser, that the public would have an opportunity to comment on the key amendments of the plan. The meeting was organized by the Financial Services Forum, with attendees including CEOs from major banks such as JPMorgan, Morgan Stanley, Citigroup, and Bank of America. It was revealed that the CEOs inquired whether the Fed would act independently of other regulatory bodies when releasing the key amendments and seeking public opinion. Some attendees noted that Powell indicated the Fed might indeed act independently. He mentioned the European Union's implementation of Basel III, which would generally increase bank capital by 10%. Powell's comments on the new capital regulations proposal were characterized as high-level, focusing on his plans to finalize the rules, partially through obtaining new public opinions and conducting studies on the proposal's impacts. He cautioned major U.S. banks to submit their concerns to the Fed now to prevent future courtroom battles. Looking back, U.S. regulators last July proposed a comprehensive overhaul of bank capital requirements to address evolving international standards and recent regional banking crises. The proposal demanded a 16% capital increase for banks exceeding $100 billion in assets, with the largest eight banks in the U.S. needing to up their capital by roughly 19%. This proposal, linked to the decade-long Basel III reforms, was described as the "final phase of Basel III" and aimed to address issues highlighted by the failures of Silicon Valley Bank and Signature Bank. However, recent reports indicate that the Fed submitted a modified version to other U.S. regulators, significantly lowering the capital requirements for major trading banks, potentially reducing the increases from 16% to as low as 5%, substantially easing the burden on Wall Street banks. Some claim that this policy relaxation represents a victory for Wall Street banks, which engaged in intense lobbying following the proposal's release last July. Significant revisions to the plan are likely necessary for Powell to secure broad support from the board. Previously, U.S. banking groups launched vigorous lobbying efforts, asserting that the initial regulatory proposal would diminish the competitiveness of U.S. banks and reduce the affordability of household and business loans. Major U.S. banks argued that their capital reserves not only withstood the COVID-19 pandemic but also regularly passed the Fed's annual stress tests, rendering any capital increase unreasonable, with some banks even threatening litigation. Powell's recent closed-door meeting with U.S. bank CEOs is seen as an attempt to leverage his personal influence to secure consensus between Wall Street and the Fed's board, pushing the proposal towards completion. In a congressional hearing last July, Powell informed U.S. legislators that considerable progress had been made in revising regulations in line with Basel III, and regulators were "very close" to finalizing the updates. Powell believes regulators should seek more input on the "American version of Basel III." The Fed will observe a public comment period of about 60 days following the release of revised proposals. He emphasized that there is still some distance to finalize the proposals, and he declined to disclose the exact adjustments to the "American version of Basel III," citing early 2025 as a possible completion timeline. Analysts assert that Powell's mention of the revised plan signifies a crucial step, indicating that the final version might not be determined this year; its impact will largely depend on the election results, signifying significant uncertainties for U.S. bank capital reforms.