A wave of optimism regarding the relaxation of capital requirements under President Donald Trump initially sent bank stocks soaring at the beginning of the year. However, as the anticipated reforms have yet to materialize, investors are left feeling disillusioned, especially those hoping for swift share buybacks. The reality is that filling key supervisory roles at regulatory bodies has proven to be a slower process than expected.

Key Appointments and Regulatory Changes

Michelle Bowman has recently been nominated as the vice-chair for supervision at the Federal Reserve, a move that could influence the rule-making landscape significantly. Meanwhile, the acting leaders at the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are awaiting confirmation. Treasury Secretary Scott Bessent has clarified that there are no plans to consolidate these agencies, which leaves bankers hopeful that the new appointments will view the banking industry more favorably than previous administrations.

The Future of Fed Stress Tests

Among the potential changes on the horizon, the Fed’s stress test framework appears to be the priority. In a rare move to expedite reforms, banks filed a lawsuit against the Federal Reserve right after the institution announced plans to enhance the transparency and stability of its stress tests. While the original opacity of the models was aimed at preventing banks from manipulating outcomes, increased transparency could risk undermining the entire testing process.

• Key issues being debated include:
  • Transparency in models: Too much clarity may weaken the efficacy of the tests.
  • Market scenario debates: Allowing banks to challenge annual scenarios could dilute the stress-testing process.

The Fed is considering a phased implementation of capital requirements over two years, rather than immediate full enforcement. This rolling approach could help banks strategize more effectively and reduce the drastic fluctuations in their capital needs.

Adjustments to Capital Requirements

Another area where banks are seeking relief is the G-SIB (Global Systemically Important Bank) surcharge. The U.S. standards are currently more stringent than those in Europe, which could be advantageous for major banks like JPMorgan Chase and Morgan Stanley. For instance:

• The G-SIB surcharge in the U.S. adds two percentage points to capital ratios compared to international norms.
• For banks like Bank of America, Citigroup, and Goldman Sachs, the surcharge is 1.5 percentage points higher.

Switching to international capital standards could potentially free up approximately $35 billion in capital for JPMorgan, aligning them more closely with European banks.

Potential Reforms on Treasury Capital Charges

Recent discussions have also centered around reducing the capital charges that banks incur for holding U.S. Treasuries. This initiative is aimed at enhancing liquidity in the government bond market by lessening the financial burden for banks involved in trading. However, critics argue that this approach oversimplifies a more complicated issue.

The Basel III Transition

Lastly, the transition toward the Basel III standards represents a significant and ongoing challenge, requiring extensive revisions to the current U.S. regulations. This lengthy process will involve updating numerous pages of complex material that has faced criticism over time.

Bankers anticipate that revisions to the stress-testing system will occur soon, as the Fed can act independently. Adjustments to the G-SIB buffer may follow quickly after the confirmation of new agency heads. However, a more effective strategy could involve a comprehensive review of all regulatory aspects to establish a cohesive framework that aligns with international standards. Bowman has previously advocated for this holistic approach during her tenure on the Fed board.

While the timeline may be frustrating for banks and their investors, a well-structured and thoughtful reform process is essential for long-term stability in the financial sector. As emphasized before, ensuring the integrity of these reforms is paramount to achieving a lasting solution.