By Pete Schroeder and Nupur Anand
WASHINGTON, June 18 (Reuters) - Large U.S. banks on Thursday will formally pitch the central bank on tweaks to a Federal Reserve proposal aimed at reducing the funds they must set aside to absorb potential losses, as the central bank enters the last leg of a marathon overhaul of U.S. capital rules.
Among their top asks will be reductions to capital assigned to Wall Street trading activities, scrapping a requirement to hold capital against unused credit card lines,
and further fixes to reduce the impact of a surcharge levied on globally interconnected banks, according to five industry executives and employees. The officials spoke anonymously to discuss ongoing regulatory matters and the contents of comment letters that are not yet public.
U.S. regulators led by the Federal Reserve in March unveiled new relaxed drafts of sweeping capital rules, which they estimated would reduce big banks' loss-absorbing capital by around 4.8%, arguing the current rules are hurting the economy. The so-called 'Basel' rules overhaul how banks measure their risk and in turn how much capital they need.
Lenders believe the new proposal is a dramatic improvement from the central bank's original 2023 plan put forward by Democratic officials keen to impose stricter bank rules, which had envisaged a 20% capital hike following regional bank failures.
But after analyzing hundreds of pages of proposed technical changes, lenders have identified issues which they will make one last-ditch push to fix, the sources said.
The deadline for banks to submit formal comments is Thursday. A Fed spokesperson did not respond to a request for comment.
"There's a really big push to get it wrapped up in the next six months because there are other items on the regulatory agenda," said Matthew Bisanz, a partner at Mayer Brown who specializes in financial regulation.
Critics of the easier rules argue that trimming bank capital requirements makes the firms more vulnerable to risks, and could hurt the economy should financial firms falter and restrict lending.
Last month, Phillip Basil, director of Economic Growth and Financial Stability for Better Markets, said in a press statement "strong capital standards are the foundation" of a resilient banking system, because "they ensure that banks—not taxpayers, workers, or small businesses—absorb losses when risks materialize."
TRADING, CREDIT CARD CHANGES
Wall Street banks will argue that regulators have been too conservative and blunt in assigning capital to trading activities, especially since the Fed annually gauges individual banks' risks with its "stress test" health checks. Industry groups will suggest changes that could dramatically shrink or even erase the additional capital the Fed has proposed for that business, executives said.
The banking industry is also expected to push back against a requirement to effectively hold capital against 10% of unused credit lines known as "unconditionally cancelable commitments," the most common of which is unused credit card lines.
Currently, such credit lines are capital-free because banks can yank them at any time, but regulators argue that in practice lenders may not do that during times of economic stress due to client relationships or other risk management practices.
A handful of the biggest banks will also make another push to soften the capital "surcharge" the Fed imposed on global systemically important banks in the U.S., or "GSIB," following the 2008 financial crisis.
The Fed proposed a one-time adjustment to account for economic growth dating back to roughly 2019, as well as automatic updates for future growth, which would in turn reduce banks' size relative to the economy and the resulting surcharge. But lenders will again argue it should account for growth since its creation in 2015, the people said.
NO MAJOR CHALLENGE
Banks do not plan to push back hard the way they did in 2023. Multiple executives said banks have pared back their asks, focusing on the most significant issues.
One industry group identified nearly 100 issues with the proposal but plans to make the case for only a few dozen, according to one of the people who is familiar with the plan.
Reuters had previously reported that Fed Vice Chair for Supervision Michelle Bowman, who is leading the rulewriting effort, had conveyed to banks they should be measured in their feedback, and executives said the industry is keen to move on from a policy fight that has sucked up years of time and energy.
(Editing by Michelle Price and Aurora Ellis)
