Bank CEOs Express Concerns Over Proposed Capital Rules and Potential Economic Impact

On Wednesday, the chief executive officers (CEOs) of the largest banks in the USA portrayed a grim outlook for the U.S. economy if regulators proceed with a proposal mandating banks to increase their capital reserves as a buffer against potential losses, reports BankingDive.

Jamie Dimon, the CEO of JPMorgan Chase, expressed his concerns before the Senate Banking Committee, stating that the proposed rule would render many banking services economically unviable. He anticipated two possible outcomes: some banks may cease offering certain products and services altogether, while those that continue may have to raise prices to justify providing those services.

The CEOs, including Jane Fraser of Citi, Brian Moynihan of Bank of America, David Solomon of Goldman Sachs, Charlie Scharf of Wells Fargo, James Gorman of Morgan Stanley, Ronald O'Hanley of State Street, and Robin Vince of BNY Mellon, were addressing the Basel III endgame—a set of international standards established by the Basel Committee on Banking Supervision in response to the 2007-08 financial crisis.

The Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. jointly released a 1,089-page proposal outlining new capital standards. These standards would necessitate the eight globally systemically important banks in the U.S. to maintain approximately 19% more capital on their balance sheets.

Bank trade groups and Republican lawmakers have widely criticized these rules. During the committee hearing, Senator Tim Scott, the panel's ranking member, referred to the proposal as a "nightmare" that could negatively impact Americans living paycheck-to-paycheck by requiring banks to hold significantly more capital.

Several CEOs warned that increased capital requirements might drive financial activities away from regulated banks and towards less regulated sectors. Jamie Dimon emphasized that the intended risk mitigation might ironically result in a higher shift towards less regulated markets, increasing overall risk.

Jane Fraser added in her testimony that these rules could place the U.S. at a competitive disadvantage globally. She explained that the increased cost for banks to offer various products might lead to more activity in the less regulated nonbank sector, posing risks to consumers and the stability of the financial system while diminishing the industry's ability to compete internationally.

David Solomon echoed this sentiment, labeling the proposals as "punitive regulatory measures" that could harm U.S. competitiveness in global capital markets. He highlighted the potential impact of geopolitical stresses on economic growth and stability, identifying the new capital rules as a headwind to U.S. economic recovery and stricter than those in other jurisdictions.

James Gorman criticized the measures as "wholly unnecessary," predicting that they would make credit more expensive and less accessible for consumers and businesses. He emphasized that the strength of the U.S. economy lies in its banking system.

Furthermore, Jamie Dimon criticized the lack of economic analysis preceding the introduction of the proposal, expressing concerns about the "propose now, study later" approach in Washington. He emphasized the need for thoughtful analysis before implementing such significant regulatory changes.