Wall Street banks seek bipartisan backing for Fed capital relief

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Wall Street banks seek Fed capital relief

Highlights

Fed Vice Chair Michelle Bowman proposes capital rule changes reducing big-bank capital by 4.8%, reversing Michael Barr's 2023 plan to increase requirements by 20%.
Bank executives seek further capital relief, including GSIB surcharge reductions and changes to Basel credit card line rules, but fear deeper cuts could lose Democratic support.
Regulatory experts warn that dissenting Fed votes could weaken the rule's durability, as lawsuits and political transitions may challenge its legitimacy and longevity.

Fed rule overhaul and search for consensus

As reported by Reuters, the Federal Reserve is trying to finalize the capital rule rewrite before year end, with banks looking to Vice Chair for Supervision Michelle Bowman to secure support from Democratic governors as well as Republicans. Industry executives say that matters because Democrats are poised to win one or both chambers of Congress next month, raising the risk that regulatory changes made under President Donald Trump's administration face tougher scrutiny next year.

Bowman in March proposes rule changes that reduce big-bank capital by about 4.8%, reversing course from a 2023 plan under her Democratic predecessor Michael Barr that would have lifted requirements by roughly 20%. Barr remains on the board and opposes Bowman's approach, arguing it increases systemic risk, while governors Lisa Cook and Philip Jefferson vote for the proposal and say they will judge the final rule on its merits after reviewing feedback on economic and financial resilience effects.

Bank executives say some firms still want additional relief, including lower GSIB surcharges, changes to the treatment of unused credit card lines under Basel standards and adjustments to remove overlap with other capital rules. But executives also say pushing for deeper cuts could cost Bowman Democratic support, leading many in the industry to favor a quicker bipartisan vote over a more aggressive package.

Political durability and market implications

For banks, the issue is not only how much capital relief they win, but whether the final package can survive a shift in political power in Congress or the White House. Michael Bright, chief executive of the Structured Finance Association, says bipartisan, consensus-driven outcomes tend to last longer, reflecting a broader view in the market that the Fed is trying to reach an overall compromise.

Regulatory experts say dissenting votes could weaken the final rule by giving critics and litigants more grounds to challenge the process. University of Michigan law professor Jeremy Kress says two or more dissents would delegitimize the final rule, and that risk is heightened after Better Markets sues the central bank last month over the capital rulemaking process.

The debate also highlights wider tensions inside the Fed as divisions over Wall Street oversight become more visible. Recent split votes, including the March approval of Morgan Stanley's European restructuring over objections from Barr, Cook and Jefferson, suggest consensus is getting harder to maintain as Trump pushes for greater influence over the central bank and as officials weigh the trade-off between financial resilience and lending capacity.

In our earlier article on the Fed’s internal debate over public policy communication, we explained how disagreements among officials over transparency versus a “quieter” approach were shaping market expectations ahead of the next rate decision. We noted that frequent, sometimes mixed signals from policymakers could quickly reset investors’ rate-hike odds, underscoring how Fed unity and messaging influence both credibility and near-term market pricing.

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