The Federal Reserve Board’s Vice Chair for Supervision, Michael Barr, announced on Tuesday in a speech that the Fed was watering down a proposed regulation hiking the amount of cash large banks must keep on hand amid intense Wall Street lobbying efforts.
Federal regulators are amending the Basel III endgame proposal that would have raised the reserve requirement for banks holding $250 billion or more in assets by 20% to a much smaller increase of 9%, according to Barr’s speech. The debate over Basel III brought droves of Wall Street lobbyists to Washington, with 486 federal lobbyists operating in D.C. on behalf of banks with $50 billion or more in assets as well as seven banking trade groups as of the end of 2023 — the most big bank lobbyists in the nation’s capital since the Global Financial Crisis of 2007 to 2009.
“We have spoken with a wide range of stakeholders, including banks, academics, public interest groups, consumers, businesses, other regulators, Congress, and others,” Barr said of the Basel III endgame revision process in the speech. “This process has led us to conclude that broad and material changes to the proposals are warranted.”
The cash reserve requirement increase was intended to prevent panic and consequent bank runs among depositors, but large banks argued additional reserves were unnecessary and would hurt everyday Americans by tightening credit constraints and increasing borrowing costs.
The Fed also reduced its proposed increase for most other banks without $250 billion or more in holdings, raising requirements by roughly 4% as opposed to the 16% increase posited initially, according to Barr’s speech.
Banks are disinclined to hold cash in reserve since, unlike a successful loan, cash provides no return, and even produces a loss in an inflationary environment, thus driving financial institutions to oppose increased reserve requirements, according to Investopedia.
Bank executives sought to combat the original Basel III proposal, threatening to sue if the Fed enacted the policy, with JPMorgan Chase’s CEO Jamie Dimon leading the charge, according to The Wall Street Journal.
“The journey to improve capital requirements since the Global Financial Crisis has been a long one, and Basel III endgame is an important element of this effort,” Barr remarked in the speech. “These re-proposals bring us closer to completing the task.”
The Federal Reserve declined to provide additional comment to the Daily Caller News Foundation.
Featured Image Credit: Michael Barr
