The more things change, the more big banks stay the same

Bloomberg News

When Randal Quarles took the reins as vice chair for supervision at the Federal Reserve in 2017, there was a widespread expectation that the then-new sheriff in town was going to reduce capital requirements generally, and for the largest banks in particular. That isn't what ended up happening. Ultimately the Fed's most significant regulatory relief revolved around regional banks, while the largest banks — known in the biz as global systemically important institutions, or G-SIBs — got virtually no breaks.

Six years later, the current new sheriff in town — Michael Barr, who holds Quarles' old job — on Monday unveiled his most detailed thinking so far of where he sees bank capital going next. Just as Quarles was widely expected to lower capital, the expectations for Barr's tenure centered around raising bank capital — and he did not seem to disappoint.

"These changes would increase capital requirements overall, but I want to emphasize that they would principally raise capital requirements for the largest, most complex banks," Barr said at an event at the Bipartisan Policy Center. "While this increase in requirements could lead to some changes in bank activities, the benefits of making the financial system more resilient to stresses that could otherwise impair growth are greater."

But it's worth noting that when Barr says "the largest, most complex banks," he means something different from what that term has traditionally meant. The largest and most complex banks in the United States — such as JPMorgan Chase and Bank of America — are the G-SIBs, and there are exactly eight of them (nine if you stretch the definition to include so-called "Category 2" banks). But in his speech, Barr noted that the changes he's talking about would apply to banks with more than $100 billion of assets, and there are about 30 of those. 

As for the substance, Barr — not unlike Quarles — passed on the opportunity to radically rethink the basic building blocks of the bank regulatory capital stack. The G-SIB surcharge? Barr is "not recommending fundamental changes." The stress capital buffer, he said, is "sound." 

The risk-based capital framework "should be updated to better reflect credit, trading and operational risk," he said, and that could be a big deal for all banks concerned. But the thrust of what he has in mind would be largely accomplished by finalizing the Basel III: Endgame rules that would effectively end the "advanced approaches" modeling regime — an approach that banks themselves have been skeptical about for some time. 

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As I said before, the biggest banks aren't cheering any of this and have reason to think this will be a net increase in regulatory capital, although the finer points have yet to even be proposed, much less survive the gantlet of notice-and-comment rulemaking. But the world isn't changing equally for all of the banks that would be subject to whatever adjustments this final rule will ultimately entail. Indeed, the greatest regulatory burden will likely fall on the not-G-SIB big banks that received the greatest share of relief under the current regime and that are under heightened scrutiny after the string of bank failures this spring.

All of this is to say that the Fed's vision for bank capital seems to be a neutral-leaning-negative for the largest banks and a more significant negative for their regional peers. What is more, the largest banks — some of which just got bigger — have deeper pockets to weather the transition and have already been seen as a safer bet than their smaller counterparts by businesses and consumers. Whether by design or just because of the law of the jungle, it seems like bigger is better in banking — no matter which sheriff is in town.