In a speech on Tuesday, Michael Barr, the Federal Reserve's vice chairman for oversight, announced that the Fed was watering down proposed rules that would increase the amount of cash large banks must hold on hand, following intense lobbying from Wall Street.
Federal regulators are revising the final version of Basel III, which would boost reserves. Requirements Barr's report also significantly reduced the tax increase for banks with more than $250 billion in assets from 20% to 9%. speechThe debate over Basel III has brought a wave of Wall Street lobbyists to Washington, with 486 federal lobbyists operating in Washington, D.C., as of the end of 2023, representing banks with more than $50 billion in assets and seven banking industry associations. This will be the largest gathering of big bank lobbyists in the U.S. capital since the 2007-2009 global financial crisis. (Related article: CBO says risks to federal loan issuance next fiscal year could cost taxpayers more than $65 billion)
“We engaged in discussions with a wide range of stakeholders, including banks, academics, public interest groups, consumers, businesses, other regulators, and Congress,” Barr said in his speech about the process for finalizing Basel III. “This process led us to conclude that broad and significant changes to the proposals are warranted.”
The increased cash reserve requirements were intended to prevent panic among depositors and resulting attempts by banks to run on their deposits, but the large banks argued that the additional reserves were unnecessary and would harm ordinary Americans through tighter credit constraints and higher borrowing costs.
The Fed will significantly reduce Basel III capital requirements, exempting banks with assets between 200 billion and 250 billion, excluding unrealized losses on securities in regulatory capital. The requirement for the largest banks will fall from 20% to 9%. https://t.co/NKLJ9z9THT
— Jennifer Schonberger (@Jenniferisms) September 10, 2024
Barr's speech also showed the Fed scaled back its proposed increases for most other banks with less than $250 billion in assets, raising the requirements by about 4% instead of the 16% increase originally envisaged.
Banks are reluctant to hold cash as reserves because, unlike successful loans, cash not only does not generate profits but also generates losses in an inflationary environment, so financial institutions oppose any increase in reserve requirements. According to Go to Investopedia.
Bank executives, led by JPMorgan Chase CEO Jamie Dimon, tried to fight the original Basel III proposals by threatening to sue the Fed if it enacted the policies. According to To the Wall Street Journal.
“We have a long way to go to improve capital requirements since the global financial crisis, and the final steps of Basel III are a key component of this effort,” Barr said in his speech. “This revised proposal moves us closer to completing the task.”
The Federal Reserve declined to provide additional comment to the Daily Caller News Foundation.
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