The draft of the new capital rules is about to be released! Wall Street banks are expected to be "unleashed" but technical details and political scrutiny are still obstacles.

As the regulatory agencies appointed by President Trump are set to release a draft of the relaxed new capital rules this week, Wall Street banks are poised for a victory, but this controversial project may still face new technical and political challenges. Michelle Bowman, the vice chair responsible for regulatory affairs at the Federal Reserve, stated last week that the capital requirements for large banks will be slightly decreased in the proposal to be released by federal regulatory agencies on Thursday. This marks a stunning reversal for an industry facing double-digit capital increases under the initial draft in 2023. The revised "Basel rules" and the proposal for "Global Systemically Important Banks (GSIB) additional capital" will readjust the way banks calculate capital to absorb potential losses. This reform stems from the efforts of Wall Street banks over the years to relax rules put in place after the 2008 financial crisis - banks believe that these rules have been suppressing economic growth. However, critics argue that these changes will weaken the financial system's safety net at a time when the risks of GEO Group Inc politics and private credit are rising. Industry insiders and analysts suggest that while banks are nearing victory, finalizing these complex proposals may still take up to a year as banks carefully scrutinize the details, and regulatory agencies need to address potential variables, including a new Federal Reserve chairperson and White House review. They also point out that as different banks benefit to varying degrees, there may be new negotiations within the industry to seek further adjustments. Ian Katz, managing director at Capital Alpha Partners, stated: "You're going to see hundreds, maybe thousands of pages of documents. There's a lot to review, and some of it is highly technical." While Bowman mentioned that institutions will move quickly, analysts at Truist Securities wrote last week that the proposal is unlikely to be finalized before early 2027. Significant unknowns remain The Basel rules implement international capital standards, focusing on how banks allocate capital for credit, market, and operational risks. Former vice chair Michael Barr in July 2023 released the first draft, arguing that the collapse of a Silicon Valley bank months earlier proved the rationale for increasing capital. The rule affects over 30 banks with assets exceeding $100 billion. Some large banks claim this could lead to capital increases of up to 20%. Banks argue they are well capitalized, threatening lawsuits and launching an unprecedented movement to weaken the rule. This move has gained support from many legislators and created divisions among regulatory agencies. This dragged the issue into the Trump administration, which largely sided with the industry. Bowman stated last week that these changes will better adjust requirements based on actual risks. The new Basel draft eliminates several measures disliked by banks, including stricter requirements to comply with one of two risk capital measurement methods - a blow to Wall Street trading giants. It also relaxes requirements for fee-driven businesses like credit cards, which would have been affected by strict new operational risk requirements. But banks are still seeking clarification on other hot-button issues. These include to what extent they can use internal models to assess market risks (rather than regulatory agency-prescribed models) and how much capital they must hold for non-listed securities. The Federal Reserve also plans to adjust the additional fees levied on the eight highest-risk U.S. Global Systemically Important Banks by updating some economic inputs and adjusting the calculation of short-term funding risks. Other analysts wrote that the highest-fee banks, including JPMorgan Chase, Bank of America Corp, Citigroup, Goldman Sachs Group, Inc., and Morgan Stanley, may benefit, but industry officials warn that there may be significant differences among banks. Stifel's chief Washington policy strategist, Brian Gardner, stated that the banking industry's response will depend on how the proposal impacts specific businesses. He added, "Not all big banks are the same." Political challenges It is worth noting that the new draft may also face political obstacles. Banks will have 90 days to provide feedback to various agencies, and the agencies must jointly agree on any further modifications. Industry sources state that at the Federal Reserve level, this requires a bipartisan committee vote, and if the Democratic members feel the final version is too weak, they may threaten to vote against it. The new draft also requires support from Kevin Warsh, who is nominated by Trump to succeed Federal Reserve Chair Powell. Warsh has not publicly stated his stance on capital rule modifications but is generally inclined towards looser regulations. According to an executive order by Trump in 2025, the final rule must also undergo review by the White House Office of Management and Budget, adding another potential complex factor. Nevertheless, Jeremy Kress, a professor at the University of Michigan, stated that given banks and regulatory agencies are on the same side this time, regulatory agencies "should still find it easier" to cross the finish line.