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Federal Reserve Chair Jerome Powell recently attended a closed-door meeting with a group of big-bank CEOs, encouraging them to work with the Fed to avoid a years-long legal battle over the Biden administration\u2019s landmark capital proposal.<\/p>\n
Powell told the bank chiefs, including JPMorgan Chase<\/a> & Co.\u2019s Jamie Dimon and Citigroup<\/a> Inc.\u2019s Jane Fraser, that the public would have the chance to weigh in on key changes to the plan, according to people with knowledge of last month\u2019s gathering hosted by the Financial Services Forum, a trade group for the largest US banks.\u00a0<\/p>\n Although it\u2019s not unusual for Powell or other Fed governors to meet with the panel of top bank CEOs, the discussion is the latest sign that he\u2019s using his influence to try to get consensus from the industry and Fed governors \u2014 and push the package across the finish line. The effort, a response to the 2008 global financial crisis, has been in the works for more than a decade. It has faced fierce opposition from the industry, which is preparing for a potential legal fight.<\/p>\n The Fed already has floated a dramatically weaker version of the bank-capital overhaul to other regulators, alarming some agency officials. That has prompted some observers to question whether the central bank\u2019s board, which prides itself on consensus, will give too much ground on the proposal, known as the Basel III endgame.\u00a0<\/p>\n \u201cI was disturbed by Powell\u2019s testimony the last time he was on the Hill, when he said that he expects the final Basel endgame rule to have \u2018broad support among the broader community of commenters on all sides,\u2019\u201d said Jeremy Kress, a former Fed bank-policy attorney who now teaches business law at the University of Michigan. \u201cThat\u2019s a dangerous standard, because it sets the Fed up to bend to banks\u2019 will.\u201d<\/p>\n Other Fed watchers say Powell is simply following guideposts established by law.<\/p>\n \u201cThere is a statutory requirement that the Federal Reserve must follow in setting major banking policy,\u201d said Thomas Hoenig, a former president of the Federal Reserve Bank of Kansas City and now a distinguished senior fellow at the Mercatus Center at George Mason University. \u201cIt is not, as such, consensus building but instead establishing the right policy and seeking information and comment from the industry to be certain its policy achieves the intended outcomes.\u201d<\/p>\n A Fed spokesperson and a Financial Services Forum representative declined to comment on the meeting.<\/p>\n The July 19 event in Washington also drew Bank of America<\/a> Corp.\u2019s Brian Moynihan and Morgan Stanley\u2019s Ted Pick, according to people familiar with the meeting. Fed Vice Chair for Supervision Michael Barr, seen as the architect of the original proposal, didn\u2019t attend, some of the people said.<\/p>\n The\u00a0original draft<\/a>, released in July 2023 by the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, called for an overall 16% hike in the capital that banks must hold as a cushion against financial shocks.<\/p>\n But the Fed later showed other regulators a three-page document of potential revisions that suggested an increase as low as 5%. The revisions could walk back key parts of the landmark proposal \u2014 including one that might have had a large effect on big banks with sizable trading businesses.<\/p>\n Powell told US lawmakers last month that there had been no final decision on any changes to the proposal \u2014 but \u201cquite a bit of progress.\u201d Some FDIC and OCC officials had indicated privately that they would resist any capital increase that they consider too low.<\/p>\n Others have raised concerns that the Fed might push ahead on its own with a revised proposal if the three regulators are unable to get on the same page.\u00a0<\/p>\n \u201cFor just one agency to re-propose \u2013 but with an expectation that a future final rule will be issued jointly by the three agencies \u2013 would be unprecedented, sow confusion and lead to a number of practical and legal questions,\u201d Federal Deposit Insurance Corp. Vice Chairman Travis Hill, a Republican, said last month.\u00a0<\/p>\n At the Financial Services Forum meeting, Powell was questioned over whether the Fed would act independently of other regulators when unveiling key revisions and seeking public comment, according to people with knowledge of the gathering. Some of them said they were left with the impression that it was a possibility.<\/p>\n Powell told lawmakers in July that it\u2019s important that the regulators end up with something comparable to other large jurisdictions. At the meeting with bank CEOs, he mentioned the Basel effort by the European Union, noting that its version would lead to an overall 10% capital hike, according to people familiar with the meeting. The UK\u2019s average increase would be\u00a0about 3%<\/a>.\u00a0<\/p>\n Powell\u2019s comments to banks on the capital proposal were described as high-level, focused on how he intends to arrive at a final rule, in part through seeking fresh public comments and the release of a study on the impacts of the proposal, they said.<\/p>\n The chair told banks that they should come to the Fed with issues now to avoid legal woes, the people said.<\/p>\n The Bank Policy Institute said in January that it had retained corporate litigator Eugene Scalia to fight regulators if they don\u2019t agree on a final rule with significant changes.<\/p>\n The Washington-based trade group, as well as the Financial Services Forum, the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce, sent a\u00a0letter<\/a>\u00a0to the agencies claiming that the capital plan violated the Administrative Procedure Act, which governs the process of developing regulations.<\/p>\n \u201cIn this world where people feel forced to resort to courts more frequently and where courts are listening, banking regulators are going to have to become more attentive to the rights of the banks that they\u2019re regulating and the impact that they\u2019re having,\u201d Scalia said on a March podcast with Bloomberg Intelligence analysts Nathan Dean and Elliott Stein.\u00a0<\/p>\n<\/div>\nRecommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n