Major bank regulation back in focus as top US official plans to step down

Democrats avoid worst-case scenario as regulators push through significant capital requirements for large banks

The seal of the Federal Deposit Insurance Corporation at its headquarters in Washington. Bloomberg

A top US official's intent to resign has sparked renewed debate over the future of banking regulation, as questions linger over the fate of banking reforms.

After a blistering report outlining a culture of sexual harassment and mismanagement at the Federal Deposit Insurance Corporation, chairman Martin Gruenberg announced he would resign as soon as a successor is chosen.

The news comes at a perilous time for Democrats and bank regulators seeking to push through major reforms.

Chief among those changes is the proposed capital requirements for the largest banks, otherwise known as Basel III.

The FDIC is one of three regulators – along with the Federal Reserve and Office of the Comptroller of Currency – pushing for these new capital requirements.

The proposed rule's fate was already uncertain heading into this week, but Mr Gruenberg's looming resignation underscores Basel III's uncertain future.

What is Basel III and why is it controversial?

The Basel III Endgame was first introduced in 2010, two years after the global financial crisis. But even before the collapse of Lehman Brothers, there were already cracks in the banking sector including low liquidity buffers and poor risk management.

Many reforms were made in the following decade, but the US regional banking crisis last year brought renewed focus on Basel III, and the three US regulators released a proposal that would significantly increase banks' risk-weighted assets, which increases the capital banks would need to meet minimal capital and buffer requirements.

Doing so would make the US banking system more resilient to shocks, and US regulators proposed much stronger capital requirements than those in the EU.

Under the US rules, globally important banks would need to increase their capital requirements by a range of 16 per cent to 20 per cent, while regional banks would see a 10 per cent increase.

The proposal faces significant opposition – not only from private bankers, but from Democrats, Republicans and state officials.

A vast majority of notes received during the comment period opposed the plan.

Many comments said the proposed rule would mean reduced access to credit for small businesses, homebuyers and minority communities. Others said it would harm energy projects and capital markets.

“The record of comments on the proposal includes a substantial amount of detailed and significant comments from a diverse range of industries – almost all of which express reservations about at least some aspects of the proposal,” Latham and Watkins said in a February report.

During a House of Representatives hearing in December, chief executives of eight major banks criticised the proposed rules.

“Real changes need to be made to address this over-calibration, or we risk a serious impact on financial institutions’ ability to raise and lend money for companies as well as assume risk on behalf of pension funds, mutual funds and other investors,” Goldman Sachs chief executive David Solomon said in his testimony.

That pushback is leading regulators to significantly lessen the increase for large banks, The Wall Street Journal reported.

The US, EU and UK are set to the implement the new rules next year.

Why does the FDIC chairman's replacement matter?

By staying on as FDIC chairman until a successor is chosen, Mr Gruenberg spares Democrats from having to contend with stalled banking reform.

Had he immediately stepped down, a Republican would have become acting head of the agency and the FDIC's board would be split evenly between the two parties.

Speaking from the Senate floor on Tuesday, Republican leader Mitch McConnell suggested Democrats were not calling for Mr Gruenberg's removal because of the political calculus.

“Surely their reluctance has nothing to do with the FDIC’s line of succession, which would fill a vacancy with the agency’s distinguished vice chair, who happens to be a Republican,” Mr McConnell said.

There is currently no timetable to replace Mr Gruenberg, though the White House has said it would soon nominate his successor.