By Nivedita Balu and Pete Schroeder
TORONTO/WASHINGTON, March 20 (Reuters) – While all Wall Street banks are winners under a U.S. proposal to reduce the amount of capital they must hold, institutions with big trading operations stand to benefit more than traditional lenders, and this could potentially pit them against one another as they seek final revisions.
Capital at the biggest U.S. banks — the amount they have to hold to absorb losses — would fall 4.8% under the plan released on Thursday. This would free up billions of dollars for lending, dividends and share buybacks in a victory for the industry, which faced double-digit capital hikes under a 2023 proposal that was not implemented.
Analysts said it will take time to parse thousands of pages of complex draft rules. But it was already clear that the changes will reward banks differently depending on their business models.
Some analysts and an executive at a major bank said trading giants Goldman Sachs and Morgan Stanley could come out on top under the new regime, even though their trading operations were the original targets of the “Basel III” draft rule central to Thursday’s overhaul.
Banks will have 90 days to comment on the lengthy and technical proposal, and firms are expected to make their cases for further cuts in capital requirements, which could represent billions of dollars in potential relief.
The Trump administration wants to relax capital requirements in the belief that it could boost lending and economic growth.
But critics say the changes will weaken financial system safeguards just as geopolitical and private credit risks are surging, with some major U.S. banks tightening lending while funds have capped withdrawals.
TRADING HOUSES VS LENDERS
Morgan Stanley and Goldman Sachs fought fiercely alongside other Wall Street giants including JPMorgan Chase and Citibank for two years to weaken the Basel and GSIB surcharge rules, which they said would hurt lending and the economy.
But that unity could now start to fray.
“Some will think they got worse treatment than others,” said Ian Katz, managing director of Capital Alpha Partners.
“They may feel like this other cohort or size of banks just got a better deal and have to stick up for themselves.”
The individual banks declined or were not immediately available to comment. A spokesperson for the Federal Reserve, which is leading the capital overhaul, declined to comment.
WHOLESALE FUNDING BREAK
The Fed’s new draft rules mark a dramatic turnaround for big banks which faced capital hikes of as much as 20% under the 2023 proposal.
While the Basel rules would increase big bank capital by 1.4%, that will be offset by changes to the GSIB surcharge, an extra layer of capital levied on eight systemically important global U.S. banks.
One change would reduce the impact of banks’ reliance on short-term wholesale funding in the surcharge calculation. That factor, Fed officials said, was more influential in the 2023 calculation than originally intended.
That could benefit Goldman Sachs and Morgan Stanley, because they are much more reliant on short-term wholesale funding than their GSIB rivals which have large deposit bases, said analysts and a banking source.
“The purest winners are the trading-heavy institutions,” said Michael Ashley Schulman, partner at Cerity Partners. “Cracks in the coalition may appear as the specific rule details get negotiated as different banks push hardest for most favorable treatment.”
Wall Street bank lobby groups, which have led the fight, issued a tepid statement on Thursday, saying the draft rules were an “important step forward” and that the industry “will carefully review the proposals and expect to provide feedback.”
BROADER RELIEF
Still, analysts said the changes overall would be good for the industry as a whole by freeing up money for lending, especially among big regional lenders.
Capital levels at larger regional banks such as PNC and Truist would fall by 5.2%, while banks below $100 billion in assets would receive a 7.8% decline in their capital requirements under the proposals.
Analysts at Morgan Stanley this month wrote that large U.S. banks are currently holding around $175 billion in excess capital due to years of uncertainty over where the U.S. rules would land. They could start releasing that via lending, capital markets activity and buybacks, the analysts wrote.
“I think that there’s been universal belief that this is a good thing for the industry,” said Christopher Marinac, director of research at Brean Capital.
(Reporting by Nivedita Balu in Toronto and Pete Schroeder in Washington; Additional reporting by Saeed Azhar; Editing by Lananh Nguyen, Michelle Price and Cynthia Osterman)
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