(Bloomberg) -- Large US banks may have to boost their capital by an average 20% and a broader swath of lenders would face strict requirements for setting aside money under a draft plan from US regulators to bolster the financial system.

Specific increases will depend on a lender’s business model, and banks with at least $100 billion in assets may have to adhere to the new requirements, according to people familiar with the proposals. That’s far lower than the existing $250 billion threshold where many of the toughest rules kick in, which means dozens of regional US banks might have to meet the new standard.

The actual bump in capital requirements, which may be proposed this month, will vary based on the range of banks that will be affected by the changes to key capital rules, said the people, who asked not to be identified before the plans were made public. 

The long-awaited changes are part of an international overhaul of capital rules that started more than a decade ago in response to the financial crisis of 2008. The issue became more stark this year with the collapse of several banks in the US. 

Bank Turmoil

The havoc they caused reignited debate on whether the largest regional banks should face tougher standards, while the biggest US lenders argue that capital rules that go too far will hinder economic growth.  

“Higher capital requirements are unwarranted,” said Kevin Fromer, chief executive officer of the Financial Services Forum, an advocacy group whose members are the CEOs of the eight largest financial institutions headquartered in the US. “Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time.”

JPMorgan Chase & Co. Chief Financial Officer Jeremy Barnum said late last month that the firm was expecting the proposals on implementing new standards “any day now” and anticipated increased capital requirements for trading businesses and so-called operational risk. He said that while the firm would push back on calls for more capital, it was preparing for its requirements to rise. 

The changes are part of the international regulatory effort known as Basel III. Citigroup Inc. Chief Executive Officer Jane Fraser said last week that her bank was holding off on anything beyond modest buybacks until it had more clarity on the Basel changes and the Federal Reserve’s separate “holistic” review of capital requirements.

“It’s the lever that regulators think about when they want to impose a bit more conservativism on the industry,” said Ken Achenbach, a partner at law firm Bryan Cave Leighton Paisner who focuses on bank regulation and corporate risk. “A 20% hike would be a very, very significant increase.”

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency declined to comment. The Wall Street Journal earlier reported the average expected impact from the proposals. 

Michael Barr, the Fed’s vice chair for supervision, has previously said that US officials are reviewing bank capital requirements and committed to putting in place strictures that align with Basel III. Barr, who took over as the Fed’s top bank watchdog in July 2022 and an architect of the Dodd-Frank Act of 2010, has also signaled that he supports tougher restrictions for bigger, systemically important lenders than smaller institutions. 

Yet the recent US bank failures were firms with smaller balance sheets than such global systemically important lenders. The biggest banks have argued that their steadiness in the recent turmoil showed their strength and that they already have more than enough capital. The six biggest US firms have added more than $200 billion to their capital reserves in the last decade, and JPMorgan said last month that its total loss-absorbing capacity now exceeds the loan losses that all US banks had during the financial crisis.

JPMorgan CEO Jamie Dimon has been among critics blasting more cumbersome capital requirements, calling the upcoming increase “bad for America” last year ahead of a pair of congressional hearings.

What Bloomberg Intelligence Says:

“The last remaining piece of Basel III, known informally as the Basel III endgame, would alter capital levels for US banks as regulators recalibrate risk-weighting of assets and restrict internal models used to calculate both credit and operational risk.”

—Nathan Dean, BI senior government analyst

Click here to read the full report.

The top US banks are already subject to higher requirements than their European peers, according to the European Central Bank, which oversees lenders in the euro area. Despite that disadvantage, US securities firms were able to win market share from European competitors in previous years.

The tighter rules could mean that that more business flows to private lenders, such as alternative asset managers, that aren’t subject to the same federal oversight. “Right now, this in some sense is a golden moment for private credit because the banks have pulled back, and with these regulations, that may continue or extend the period through which the banks sit on the sidelines,” said Peter Antoszyk, a partner in the private credit group at law firm Proskauer. 

One downside, Antoszyk said, is that the new constraints imposed on banks makes them less active and thus “make it harder for companies to deal with situations in which they’re experiencing stress and need additional liquidity.”  

While Europe applies Basel standards to all banks, the US distinguishes more on which rules it applies to large and small banks. Excluding mega banks, euro area lenders would face lower requirements if they were based in the US, according to the ECB.

Other jurisdictions are also working on their own implementation of the final Basel III standards. The European Union is trying to water down its version after the industry warned that a strict approach would risk choking off the supply of credit to the bloc’s economies.

JPMorgan said at its investor day that while the final pieces of Basel III capital rules — which some investors have referred to as Basel IV because they could be so extensive — may be proposed soon, they’re unlikely to be implemented before early 2025.

--With assistance from Ambereen Choudhury.

©2023 Bloomberg L.P.