US regulators will not be able to finalise controversial bank capital increases before the November presidential election, casting doubt on whether these and other strict proposed rules for Wall Street banks will be implemented at all, according to five individuals familiar with the situation.
The so-called Basel III Endgame rules would significantly change how banks with over $100 billion in assets manage their capital, potentially restricting lending and trading. Banks argue that additional capital is unnecessary and detrimental to the economy, and have strongly lobbied to block the Basel reforms.
The final outcome of this issue is now tied to the result of the 5th November election. Democratic presidential candidate, Vice President Kamala Harris, has called for tougher banking regulations. However, if Republican candidate Donald Trump wins, his administration is expected to either abandon or severely weaken the new rules, according to sources. Trump has committed to reducing regulatory constraints.
Both candidates are locked in a close race, though Harris holds a lead in some swing states.
Regulators have debated for months whether to reissue the Basel draft to allow banks to provide feedback, as reported by Reuters in June. Industry experts widely anticipate the agencies will propose the rule again, after Federal Reserve Chair Jerome Powell told Congress last month it was "essential" to do so due to significant changes. However, it remains uncertain how the Fed will convince other agencies, which aim to finalise the rule before the election, to agree to this approach, according to sources.
Even if agencies reach an agreement by next month, they would likely grant banks at least 60 days to provide feedback, a standard period for complex regulations, the sources noted. This makes it highly unlikely that officials will be able to process the comments and produce a final draft before a new U.S. administration takes over in January 2025.
This previously unreported timeline jeopardises Basel and two other debt and liquidity rules for major banks, which cannot be completed until the Basel draft is refined, freeing up staff working on it, the sources explained. Together, these rules could require banks to hold over $200 billion in additional capital and debt, according to regulatory estimates. Consequently, significant or indefinite delays would be highly beneficial to the banking industry.
Some progressives who support stricter regulations fear that the extensive campaign banks have waged against the Basel reforms, spending millions on public efforts, will ultimately block the comprehensive regulatory overhaul they had hoped for under Democratic leadership, despite last year’s bank failures revealing systemic risks.
"They were overly optimistic about how easy it would be to complete Basel III Endgame. When it became clear it wouldn’t be as simple, that drained all the energy," said Jeremy Kress, a professor at the University of Michigan, referring to the regulatory agencies.
Spokespeople for the Fed, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), who are collaboratively drafting the rules, declined to comment. Representatives for both the Harris and Trump campaigns also did not respond to requests for comment.
Powell, speaking to Congress in July, emphasised that his priority was to ensure Basel is done correctly, rather than quickly.
'MALPRACTICE'
Several Fed officials share Powell’s view that the new draft must be reissued, according to two sources. Some believe this would reduce the risk of Wall Street banks suing to block the final rule on grounds that regulators did not follow proper procedures, as Reuters previously reported.
Although the OCC and FDIC oppose reissuing the draft, it would be nearly unprecedented for them to finalise the rule without the Fed’s backing.
"It's too significant a proposal; it would be malpractice for them to finalise it at this stage, in my view," said Michael Bright, CEO of the Structured Finance Association, an industry group advocating for changes to the draft. "I don’t think this will be done before the election."
While Trump cannot remove Federal Reserve regulatory chief Michael Barr, he could replace Acting Comptroller Michael Hsu and shift the FDIC board, which votes on regulations, towards a Republican majority. These changes would swiftly place the majority of the banking regulatory agenda under the control of Trump appointees.
Another major draft rule under threat mandates that large regional banks issue up to $70 billion in new long-term debt to absorb potential losses. Proposed a year ago, this rule has been delayed partly because the amount of debt required depends on how Basel calculates the banks' risks, according to two sources. Progress on this rule could resume when there is "support" for the final Basel draft, Powell said in July.
Further delayed due to Basel is a proposed plan to impose new liquidity requirements on banks, according to sources.
Even if Harris wins, the likely appointment of FDIC chair nominee Christy Goldsmith Romero could delay the rules further. Additionally, if Republicans take control of the Senate, political pressure to weaken the regulations could grow.
"There are many uncertainties," Bright concluded.
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