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Banking Industry Pushes Back Against Proposed Capital Rules

Citigroup

Two of the largest U.S. banks said capital rules proposed by U.S. regulators could have significant impacts on credit availability and pricing for businesses and consumers.

J.P. Morgan Chase & Co. and Citigroup have expressed concerns that, if implemented without revisions, these rules that would require banks to set aside more capital could also affect their ability to engage in stock buybacks and investments, Bloomberg reported Friday (Oct. 13).

The proposed capital rules, part of the Basel III changes, aim to enhance the stability of the banking system by requiring banks to hold more capital, according to the report. U.S. regulators expect these rules to be fully implemented over the course of several years.

If implemented as written, J.P. Morgan Chase & Co. estimated that it would need to stockpile 25% more capital, while Citigroup said it would need to reassess its equity investments, the report said. J.P. Morgan’s risk-weighted assets would increase by 30%, or $500 billion, and the required capital for operational risk would triple. These increases in capital requirements could limit the ability of banks to distribute dividends and engage in stock buybacks.

The Federal Reserves vice chair for supervision, Michael Barr, said Monday (Oct. 9) that the proposed capital requirements would make the financial system safer.

“The proposal is projected to raise capital for large banks,” Barr said. “This may result in higher funding costs. But this is only half the story. Capital also enables banks to absorb more losses without risking their ability to repay their creditors.”

The banking industry is promising an aggressive push-back against the proposed capital rules, per the Bloomberg report. J.P. Morgan Chief Financial Officer Jeremy Barnum said that the bank would engage and advocate forcefully during the comment period and beyond.

The industry believes that the proposed increases in capital requirements are unwarranted and disagrees with the cost-benefit analysis, according to the report. J.P. Morgan argued that the 19% average increase in capital for the largest banks cited by regulators does not tell the full story.

Citigroup Chief Financial Officer Mark Mason also expressed the industry’s need for a better understanding of the rules and suggested offering an alternative perspective, the report said.

J.P. Morgan CEO Jamie Dimon has criticized a key calculation in the new plans as “asinine” and has repeatedly stated that the measures would make certain activities, such as mortgages and small business lending, harder for banks, per the report.

Citigroup is evaluating the pricing of credit offerings and whether equity investments will remain worthwhile if they become more capital intensive, the report said.