News: The Basel III standoff

Thursday, October 3, 2024

The Basel III standoff

Oct 03, 2024

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QUICK FIX

It’s been more than three weeks since Michael Barr, the Fed’s top regulatory official, unveiled what seemed like a deal among regulators to scale back a major proposal to raise capital requirements on the nation’s largest banks.

The major revisions to the Basel III endgame proposal, Barr said in remarks on Sept. 10, had been crafted “jointly” between the Fed and fellow regulators at the FDIC and OCC. The new proposal—which cut roughly in half the capital requirements for the biggest banks— was aimed at addressing industry and lawmaker concerns that the initial plan had gone too far.

But what was supposed to jumpstart an already dragging rulemaking process has instead led only to more stalemate.

Regulators penciled in votes on the revised proposal only to scrap them a few days later after it became plain that the changes Barr outlined didn’t have enough support to clear the five-person FDIC board.

In the weeks since Barr’s address, the Fed and FDIC have not engaged in any active or substantive negotiations over finding a path forward on the revisions, two officials familiar with the matter told MM.

The hold-up comes down to vote-counting on the FDIC board. Democratic Chair Martin Gruenberg and Acting OCC chief Michael Hsu, who negotiated the deal with Barr, need to win over a third vote on their board to advance the revised plan.

Fellow Democrat and CFPB Director Rohit Chopra has internally opposed the softened capital proposal, which Sen. Elizabeth Warren (D-Mass.) and other progressives blasted as a Wall Street giveaway.

One path would be to try to win over Chopra’s vote. But any changes to toughen the proposal could jeopardize the broad support that Barr and Fed Chair Jerome Powell are seeking from their own board. Powell has said he supports the revisions and wants the agencies to reach a deal.

Another option would be for Gruenberg to turn to Republican votes. Director Jonathan McKernan has said he’s a definitive “no” on the revised plan, saying it doesn’t go far enough in fixing the problems he had with the original.

Vice Chair Travis Hill has publicly criticized the revised plan, though he hasn’t definitely said he would vote against any re-proposal, leaving a potential opening. But it’s not clear if Gruenberg would be willing to put up a proposal that could win Hill’s vote but Chopra would reject.

The logjam at the banking agencies shows no sign of easing up any time soon, much less before the presidential election next month, which could potentially scramble the balance of power among regulators.

The FDIC and Fed declined to comment.

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Driving the Day

Weekly jobless claims data will be out at 8:30 a.m. … Atlanta Fed President Raphael Bostic will participate in a hybrid Minneapolis Fed event focused on economic opportunity at 10:40 a.m.

Place your bets — Political gambling is back on in the US, less than five weeks before Election Day. As Declan Harty reports, a federal appeals court on Wednesday cleared the way for financial exchange startup Kalshi to revive the first fully regulated election-betting markets in the country. The D.C. appeals court lifted a temporary freeze on the markets, rejecting an emergency bid from Wall Street regulators to halt trading.

Late Wednesday, the CFTC asked the appellate court to consider an expedited schedule for its appeal of the Kalshi ruling, with proposed oral arguments in early December. Kalshi’s attorneys signaled to the CFTC they would oppose the effort, the agency said.

“The court’s order will allow betting on an incredibly close and contentious race just weeks before the election. That makes this a sad and ominous day for election integrity in the United States,” said Stephen Hall, the legal director and securities specialist at Better Markets.

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2024 ELECTION

Latest on the port strike: Vice President Kamala Harris on Wednesday embraced striking dockworkers in her first public comments on the work stoppage at ports across the East and Gulf Coasts this week.Holly Otterbein and Chris Marquette report that Harris is seeking to “use the moment to draw a contrast with Trump on his labor record.”

President Joe Biden has said he won’t intervene in the strike, despite growing pressure from business groups. As Caitlin Oprysko reports, the National Retail Federation on Wednesday led a coalition of 272 trade groups asking Biden to end the dock worker strike as "an issue of both economic and national security."

Harris and former President Donald Trump "are so far taking the same side in the strike by East and Gulf Coast longshoremen — speaking up for the American workers against the foreign-owned shipping companies that control ports in the U.S.," Ry Rivard reports. “The fact that major political leaders from both parties are taking aim at the European- and Asian-based shipping companies represents an early political victory for the dockworkers.”

BANKS

OCC backs banks in fee fight: A federal regulator is siding with the bank industry in its lawsuit against a new Illinois law that prohibits credit card companies from charging swipe fees on taxes and tips.

In a court filing late Wednesday, the Office of the Comptroller of the Currency blasted the first-of-its kind Illinois law as an “ill-conceived, highly unusual, and largely unworkable state law that threatens to fragment and disrupt” the nation’s banking system. The OCC urged the judge to stop the Illinois law, arguing that the state’s new restrictions on interchange fees are preempted by federal banking laws.

BofA outage: Bank of America customers “reported having trouble accessing their bank accounts on Wednesday, but the bank said the apparent glitch has been largely fixed,” CNN reports.

CFPB Director Rohit Chopra said regulators were “closely monitoring” the reports and “expect institutions to work with customers affected by system outages - no consumer should be charged fees or penalties due to a bank’s system outage.”

Hurricane relief: Federal and state banking regulators say they’ll offer flexibility to financial institutions operating and servicing customers in areas that have been devastated by Hurricane Helene. The regulators said in a joint statement they’ll “provide appropriate regulatory assistance to affected institutions subject to their supervision.” They encouraged lenders to examine potential loan modifications for borrowers who are experiencing financial difficulties as a result of the storm.

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trade

The New Consensus — Council on Foreign Relations President Michael Froman, who was the U.S. Trade Representative during President Barack Obama’s administration, warns in a new article this morning that Washington’s “new consensus” on trade and industrial policy has failed to fully address its cost. The reliance on export controls, restrictions on foreign investment and other, more protectionist tools don’t account for inflation, or provide the necessary resources to create a more resilient workforce.

On the Hill

First in MM: Senate Banking ranking member Tim Scott (R-S.C.) and Sen. Mike Rounds (R-S.D.) are probing the Federal Reserve Bank of New York over recent reporting that the way it processes Iraq's international transactions allows Iran to circumvent sanctions, Eleanor Mueller reports.

"If accurate, this would represent one of the single greatest failures of the U.S. financial regulatory regime," the lawmakers wrote in a letter to New York Federal Reserve President John Williams and Federal Reserve Chair Jerome Powell. "This reporting is especially troubling as we approach the anniversary of October 7th and the horrific attacks carried out by Iran’s terror proxy, Hamas, against our great ally, Israel."

They gave Williams and Powell until the end of the month to provide documents like related correspondence and process audits.

Spokespeople for the Federal Reserve Board and the New York Federal Reserve said in statements that they have received the letter and plan to respond.

Jobs report

— Wall Street enforcer steps down: The SEC’s enforcement director, Gurbir Grewal, plans to leave his post later this month after more than three years on the job. The former New Jersey attorney general, as Declan reports, caps off “a wild tenure that entailed cracking down on the biggest names in the $2 trillion cryptocurrency market, one of the most notable market-manipulation schemes in recent years, and a host of other cases against financial giants.”

Grewal is set to leave the SEC on Oct. 11. He’ll be succeeded by Sanjay Wadhwa, currently the SEC's deputy enforcement director, on an acting basis, the agency said. Sam Waldon, the chief counsel in the SEC's enforcement division, will serve as acting deputy director.

First in MM: Sen. Mark Warner (D-Va.) has hired Nick Larsen as a legislative assistant working on Senate Banking issues, Eleanor reports. Larsen, who will start later this month, is currently a legislative assistant working on House Financial Services issues for Rep. Jim Himes (D-Conn.).

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ODDS AND ENDS

SRTs — The Managed Funds Association has written a primer on synthetic risk transfers, a financial instrument that allows banks to shed loan book risk by purchasing credit derivatives from hedge funds, private equity firms and asset managers. The strategy has raised red flags on Capitol Hill, but MFA’s President and CEO Bryan Corbett contends the strategy can foster “a more resilient and efficient financial system.”