Federal regulators can expect a stiff fight from banks as they look to dramatically increase capital and other risk management requirements for lenders in 2024.
Much of the banking regulatory agenda for the year ahead looks like a response to the failures of Silicon Valley Bank,
“My theme is they’re still going to fight last year’s battles with new regulations on capital and liquidity,” said Lawrence Kaplan, the chair of Paul Hastings LLP’s bank regulatory group.
But the regulatory overhaul coming in 2024 goes much further, with mergers and debit card interchange fees also in the spotlight.
Many of the new rules will likely face an uphill climb, with banks getting increasingly comfortable suing their federal overseers, and the US Supreme Court set to hear cases potentially making it easier for lower courts to overturn agency regulations.
“I’m sure a lot of this will probably get litigated,” said Brett Watson, the chair of Cozen O’Connor’s retail banking practice.
Capital Endgame
Tougher capital rules would be restored for banks with $100 billion to $250 billion in assets under the sweeping plan from federal banking agencies, following a regulatory rollback for those lenders during the Trump administration.
The enhanced capital requirements include calculations for protecting against operational risks such as cyberattacks and fraud, as well as market and credit risks.
The largest international banks—including
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Supporters of the rules say they’re necessary to shore up the banking system in the wake of last year’s regional bank failures, and that lenders can afford the higher capital requirements.
But bank CEOs, trade groups, and Republican lawmakers have been pushing back hard against the proposal, saying the coming capital increases will decrease lending and push risky activity into largely unregulated shadow banks.
British regulators in December issued their own Basel endgame proposal that would raise banks’ capital levels by around 3%, further raising the ire of US banks.
The Fed, FDIC, and OCC are facing opposition even from their usual allies. Some Democratic lawmakers and fair housing groups say the proposal’s treatment of mortgages will make it harder for banks to issue home loans, even though nonbank lenders issue most mortgages.
Democrats and environmental groups have raised concerns the endgame rules will also make it harder for banks to finance projects that qualify for green energy tax credits.
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Responding to the complaints, the Fed, FDIC, and OCC have indicated they’re willing to dial back some parts of the proposal, in particular on operational risk and mortgage lending.
Whether those potential changes will allow the regulators to avoid a lawsuit is unclear. But right now, banking groups appear to be gearing up for a fight in court.
“This particular proposal could face industry litigation,” said Isaac Boltansky, the director of policy research at brokerage BTIG LLC in Washington in a client note.
Regulators are aiming to complete the Basel endgame rules in the first half of 2024, in a bid to avoid subjecting them to potential repeal using the Congressional Review Act after the election.
Liquidity Focus
One of the key drivers of last year’s crisis among midsize banks was a lack of liquidity at the lenders that collapsed.
Regulators began taking steps to address those concerns after the failures, with examiners looking closely at bank assets that could be sold off in an emergency.
Kaplan says he expects that focus to continue in 2024, as evidenced by a Dec. 1 speech by Fed Vice Chair for Supervision Michael Barr suggesting banks should have a wide range of tools for accessing liquidity.
Regulators will likely distribute guidance or take supervisory actions “bank-by-bank based on conditions” as opposed to issuing industry-wide regulations, Kaplan said.
Bank Failures
The sudden failures of SVB and Signature highlighted another problem: Regulators didn’t have a way to safely take apart a large regional bank, forcing the government to step in to shore up support for midsize lenders.
The banking regulators are taking steps to address that.
“This is the piece of the Dodd-Frank puzzle that hasn’t really been dealt with,” said Alexandra Barrage, a partner at Davis Wright Tremaine LLP and a former top FDIC official.
The 2010 Dodd-Frank Act required the biggest banks to put together annual resolution plans, also known as living wills, that would outline ways to take them apart if they failed. Smaller banks aren’t subject to the requirement.
The FDIC, which is responsible for dealing with bank failures, issued a proposal in August that would require larger midsize banks with $100 billion or more in assets to file resolution plans every two years with detailed instructions for how to take them apart. Banks with $50 billion to $100 billion in assets would be required to provide so-called informational filings that don’t include wind-down plans.
“We had these failures in March, and these failures were around these large regional banks that the FDIC has been historically concerned about,” Barrage said.
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The Fed and the FDIC also issued guidance aimed at having more consistent orderly resolution plans among big bank holding companies. Some critics have questioned whether the current plans would actually be used in the case of a global bank’s failure, or whether they would prevent the kinds of systemic failures that marked the 2008 financial crisis.
Additionally, the Fed, FDIC, and OCC released a proposal that would require banks with $100 billion or more in assets to issue a minimum amount of long-term debt that could be used to safely take them apart in the event of a failure.
The regulators expect to finalize those proposals in 2024.
Merger Reviews
This year could see a spike in small lenders looking to merge to handle growing regulatory costs—presenting a dilemma for antitrust regulators in Washington.
“If the Basel proposal is finalized, banks are going to be more interested in mergers, and regulators have been a little unclear about what their views are on bank mergers going forward,” said Mayer Brown LLP partner Andrew Olmem, a former top Trump economic adviser.
The Justice Department is updating merger guidelines focusing on how a bank deal could affect different types of customers, along with traditional concerns like concentration that could pose hurdles for bank tie-ups. Among the banking regulators, the Fed, FDIC, and OCC have sent mixed messages on bank mergers.
Supporters of the coming guidelines point to concerns about consolidation in the banking industry creating institutions that are too big to fail. Industry observers expect the guidelines to be applied mostly to big and regional bank deals, rather than those involving community lenders.
Fee Fight
Banks and retailers have been fighting over interchange fees—the charges merchants pay to process a credit or debit card transaction when a customer checks out—for about as long as credit and debit cards have existed.
The Fed waded into the fight again in October, proposing to cut the interchange fee banks can charge on debit card transactions by around 28%, to 14.4 cents per transaction plus 0.04% of the transaction amount.
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Comments are due Feb. 12, but Watson says a final rule is likely to look very similar to the proposal.
“I’m sure the debit interchange issue is as close to a done deal as you can get,” Watson said.
That could set up yet another fight between banks and their regulators at the Fed. Financial institutions are also preparing to challenge proposals from the Consumer Financial Protection Bureau to curb credit card late fees that generate billions in annual revenue for lenders.
Scandal Overhang
Along with the regulatory changes, the FDIC and OCC are facing the fallout from scandals that rocked both agencies in 2023.
The OCC is taking heat for hiring a chief financial technology officer who faked his credentials, with House Republicans demanding how that could happen.
More importantly, Republicans have called for the resignation of FDIC Chairman Martin Gruenberg over allegations of sexual harassment and other workplace misconduct among agency examiners that led women to quit their jobs.
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The FDIC hired Cleary Gottlieb Steen & Hamilton LLP to conduct an independent review that is expected to wrap up in the coming weeks. If Gruenberg is forced out, FDIC Vice Chairman Travis Hill, a Republican, would lead a split board, making it much harder for the FDIC to agree with the Fed and the OCC on new capital and other regulations.
The problems at the FDIC have affected staff throughout the agency.
“It definitely affects morale, and it’s a distraction. It’s hard to ignore, and it’s definitely impacting people,” Kaplan from Paul Hastings said.
