(Yahoo!Finance) - Two Federal Reserve officials this week suggested changes to new bank capital rules proposed by their own agency, adding to the pressure on regulators to revise the controversial requirements.
Fed Governor Michelle Bowman used a speech Wednesday before the US Chamber of Commerce to argue that the plan needs "substantive changes" and that an increase in capital requirements at the scale proposed by regulators could significantly harm the economy.
"Higher levels of capital enhance financial resilience — up to a point," Bowman said. "But capital is not costless ... Relying simply on the 'more is better' approach downplays or ignores ... critically important tradeoffs."
At issue are higher capital requirements that were unveiled last summer by Fed Vice Chair for Supervision Michael Barr. Those requirements focused on the amount of capital that banks must have in reserve to protect themselves from insolvency.
Regulators have said the proposal would result in a 16% increase in capital levels and a 20% increase in risk-weighted assets for big banks.
In the months since, the banks have launched a campaign to roll back the new rules — or scrap them entirely. Many banks submitted letters to the Fed listing the many problems they have with the rules ahead of a deadline for those comments that ended Tuesday.
The banks have contemplated suing if the rules don’t get changed. JPMorgan Chase (JPM) CFO Jeremy Barnum openly discussed that possibility with reporters during a conference call last Friday.
Suing the bank’s own regulator "is never a preferred option," he said, but "it can’t be taken off the table."
The Bank Policy Institute, a trade group representing JPMorgan and other big banks, has reportedly hired a lawyer to prepare a lawsuit if the rules don’t get changed, according to a report by Semafor.
Goldman Sachs (GS) CEO David Solomon told analysts Tuesday the capital proposal "should be withdrawn and re-proposed."
But the Fed, he added, "is listening carefully" to the feedback, calling this moment "the end of the beginning of the process."
Solomon said he doesn’t think anyone assumes the rules will move forward as proposed.
Bowman, the Fed governor, said she is "cautiously optimistic" that policymakers can work toward a "reasonable compromise" that addresses what she views as the two most critical shortcomings of the proposal: capital requirements that are too high and the lack of regulatory tailoring.
She wants the Fed to tailor capital requirements to a bank’s size and risk profile as the regulator does now, arguing that she hasn’t seen compelling evidence that changing this approach would bolster the banking system.
Bowman argued that the cost of capital impacts every aspect of banking and the cost and availability of products and services, cautioning that the higher costs will get passed on to consumers in the form of higher costs for financial services or fewer services.
She said the Fed needs to carefully weigh the costs and benefits — safety from higher capital levels, with the direct costs to banks, and the effects on consumers, businesses, and the broader economy.
Bowman noted that banks near the $100 billion asset size are already thinking of the viability of holding assets near that size to avoid higher capital requirements, while banks above that threshold are considering ways to either shrink or merge to better absorb the costs of the new requirements.
"As I view the landscape today, I do not view these differences as insurmountable obstacles to achieving a more effective and efficient set of Basel capital reforms," Bowman said.
"The data collected and released should … serve as a guide to assist in shaping the next iteration of this proposal, whether that be in the form of a re-proposal or significantly revised final rule."
By Jennifer Schonberger · Senior Reporter
