Wall Street Banks Face Regulatory Headwinds That Could Deplete $118 Billion In Excess Capital

Wall Street’s financial giants, including JPMorgan Chase & Co. JPM, Bank of America Corp. BAC, Citigroup Inc. C, Goldman Sachs Group Inc GS, Wells Fargo & Co. (NYSE WFC), Morgan Stanley MS and others are gearing up for impending regulatory shifts that could potentially obliterate nearly all of the $118 billion in extra capital they’ve gathered over the previous decade.

This move could significantly restrict shareholder buybacks for the foreseeable future.

On Thursday, July 27, the Federal Reserve and the Federal Deposit Insurance Corporation will hold separate open meetings to discuss proposed changes on banks’ regulatory capital, marking the first step towards the U.S. adopting the final version of the Basel III international banking standards.

Jason Goldberg, an analyst at Barclays, voiced investor concerns, stating, "There's certainly a great deal of angst from investors around these expected proposals.”

Bank Executives Criticize The Move

The proposed changes are part of a comprehensive review initiated by Michael Barr, the Fed’s vice chairman for supervision, marking the most significant overhaul of capital rules for U.S. banks since the financial crisis in 2008.

These proposals have already drawn criticism from top banking executives. They argue these plans could render them less competitive against their European counterparts and private equity behemoths such as Apollo Global Management APO and Blackstone Inc. BX

According to Bloomberg Intelligence, six U.S. major banks currently hold an estimated $118 billion in excess common equity tier 1 capital. If Barr’s proposals are implemented, this safety net could be nearly obliterated, resulting in an equivalent of an additional two percentage points of capital.

Arnold Kakuda, an analyst with Bloomberg Intelligence, warned, “The Wall Street banks will be disproportionately affected. Trading businesses will be particularly hard hit.”

Dimon Threatens Price Hikes

The Federal Reserve has stated the banks affected by these changes should be able to accumulate the required capital within two years, even if they continue to pay dividends and assuming they maintain their current earnings rate.

A Morgan Stanley analysis found only JPMorgan and Bank of America could meet this timeline.

JPMorgan CEO Jamie Dimon stated earlier this month the company would most likely have to raise prices for products most affected by the changes. Other Wall Street bank executives have also voiced concerns that the new rules will limit their ability to provide low-cost loan options to borrowers.

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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