New Bank Capital Plan Targets Wealth-Management Fees, Others

WASHINGTON—U.S. regulators plan to make large banks bolster their financial footing, moves that could have an outsize effect on firms such as American Express and Morgan Stanley that rely on types of fee income targeted by the new rules. 

Banking regulators on Thursday are meeting to propose new rules that could raise overall capital requirements by roughly 20% at the largest banks, officials said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses. 

Banks that depend on certain types of fee income, such as from wealth-management business, also would face heightened requirements, regulators said. That is because the plan treats such activities as sources of so-called operational risk—a broad category that includes the potential to lose money from flawed internal processes or from external threats such as cyberattacks.

Capital is the buffer banks hold to absorb potential losses. The new rules aim to more explicitly guard against the risks of a broader array of activities. The industry argues many of these activities are benign and plans to fight the changes.

Thursday’s plan is expected to hit banks with large wealth-management businesses, such as Morgan Stanley, and American Express, whose credit-card network generates swipe-fee income. Executives from both firms have said on recent earnings calls that they remain well above their minimum capital levels. 

“The devil is in the details here,” Jeffrey Campbell, American Express’ chief financial officer, said last week. “But I think my overarching message is we don’t see it as a material event for this company.”

Most banks already have enough capital to meet the new requirements, Michael Barr, the Federal Reserve’s vice chairman for supervision, said recently. But some banks have said they may temporarily hold off on share buybacks until they see how the rules affect them, while others have said they may pull back from certain activities.

Thursday’s plan to ratchet up overall capital is expected to be the first of several steps regulators will take to beef up rules for Wall Street. 

Tougher rules were already on the way for the biggest lenders before the March failures of Silicon Valley Bank and another bank sent tremors through the industry. Since then, regulators said they would apply new rules to a wider range of banks. 

Now, institutions with at least $100 billion in assets would generally have to comply with the capital rules, a group that encompasses 36 large U.S. banks, according to federal data. 

Thursday’s plan would also end a regulatory reprieve that allowed some midsize banks to effectively mask losses on certain securities they hold. Supporters of the change say it would have forced SVB to address its mounting losses earlier as interest rates rose and the value of its holdings declined. Regulators also are preparing to add to regional banks’ financial cushions by requiring them to raise long-term debt to absorb potential losses.

If three agencies—the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—propose the rules along largely party lines as expected, they would collect feedback through the end of November. They would have to vote again to complete the changes and would implement them in phases through June 2028.

Regulators have several ways to require banks to hold a bigger buffer to absorb losses. The most direct is to raise the overall amount of capital banks must hold against their total assets. But two banks with the same amount of assets can have very different risk profiles.

Recognizing this, regulators can also tell banks to hold more capital against assets that are seen as riskier. That can force some banks to hold higher levels of capital, regardless of their size, if they want to stick with those businesses.

Thursday’s proposal—the last piece of capital rules global policy makers crafted after the 2008-09 financial crisis—seeks to make banks around the world measure the riskiness of their assets in comparable, transparent ways.

Large banks could respond by holding more capital or shifting their holdings to less risky assets. They could also charge more for services to compensate for heightened capital requirements, or pull back from some businesses altogether.

The biggest banks had hoped regulators would offset the capital increases by easing requirements elsewhere. They say they already have far more capital than they would need in a crisis. As evidence, they point to their stress-test results and their ability in March to pump $30 billion in combined deposits into struggling First Republic, which later failed.

Banks have also criticized specific aspects of the plan, including one that would boost the overall amount of capital they must hold against home loans. They say it would provide a disincentive to engaging in such lending as many banks have already stepped back from the mortgage market.

Write to Andrew Ackerman at [email protected]