The deadline for public comment on the Federal Reserve-led revamp of capital requirements has closed, but the dust has hardly settled. Consensus may be that the rule — proposed in July and aiming to force the biggest U.S. banks to hold roughly 19% more capital — is among the most contentious in decades.

“I don't think in my experience in representing and serving the banking sector, I've ever seen so many disparate groups across the ideological spectrum raise their hands with concerns over rule proposals, ever," American Bankers Association CEO Rob Nichols said Tuesday, according to American Banker.

Some of it, said Isaac Boltansky, an analyst at the brokerage firm BTIG, is a “biblical dynamic.”

“Capital goes up, banks yell,” Boltansky told The New York Times. “But this time is a little bit different.”

Here, we’ll look at some of the most critical comments the proposal has seen, from sources expected and unexpected.

Michael Barr’s Fed colleagues

Perhaps an early indicator that the road to a final rule wouldn’t be easy was that two Fed governors — Republicans Michelle Bowman and Christopher Waller — dissented to the proposal, shepherded by the central bank’s vice chair for supervision, Democrat Michael Barr.

Their opposition continued this week, even though the proposal’s authors, months ago, pledged to collect more data from banks that would be affected by the rule.

1. Fed Gov. Christopher Waller

“It's got to have a major overhaul, in my view, to get a reasonable product, and possibly just taking it back and starting over,” Waller said Tuesday in an appearance at the Brookings Institution.

Waller’s criticism is two-pronged: He has expressed concern that added holdings would reduce banks’ ability to extend credit.

“We're basically going to impinge on capital market functioning, both in terms of products, services and pricing,” Waller said Tuesday, according to American Banker.

While the proposal has, at times, been couched as a vessel for the U.S. financial system to catch up to European banks that had adopted more of the Basel III framework sooner, Waller has said the U.S. proposal goes beyond what the Basel Committee on Banking Supervision asks — cutting against the idea that standards be more or less uniform.

“We decided to go ahead — that's not harmonizing," Waller said.

Word from Basel

2. Pablo Hernández de Cos, Basel Committee chair

That’s OK, Hernández de Cos told the Financial Times.

“By their very nature Basel agreements only set minimum regulatory standards,” he said. “If any jurisdiction thinks that for its own banking sector the implementation of Basel III is not enough in order to reach the same degree of assurance of financial stability, then it’s absolutely justified to go beyond the minimum requirements.”

What the U.S.’s biggest bank says

3. JPMorgan Chase

A long-standing criticism of the July proposal was, in the words of House Financial Services Committee Chair Patrick McHenry, R-NC, the “paltry” 17 pages of impact analysis the proposal’s authors included in the 1,087-page rule.

In a comment letter dated Tuesday, JPMorgan Chase CFO Jeremy Barnum said there’s been “very little publicly disclosed quantitative analysis justifying the need” to materially increase capital requirements for large banks that, by “widespread acknowledgment” are well capitalized, according to Bloomberg.

JPMorgan proposes adjusting the economic growth surcharge for global systemically important banks.

Barnum backed off from commenting, however, at the idea that the bank would participate in a lawsuit over the capital-requirements proposal.

“We're not going to get that specific about potential litigation strategy at this point," Barnum said on JPMorgan’s earnings call last week, according to American Banker. "Obviously, suing your regulators is never your preferred option, but it can't be taken off the table when you're talking about something serious."

Wait, lawsuit?

4. Bank Policy Institute

The possibility of legal action is a "last resort," Greg Baer, CEO of the Bank Policy Institute, said at a Tuesday press conference, according to American Banker. The trade group takes the position that regulators should restart the rulemaking process.

"Calls for 'withdrawal or we will sue' is unprecedented, post-financial crisis, and demonstrates a sea change in the way the bank trade associations are fighting back against this rule," Edward Mills, a managing director at Raymond James, told American Banker.

BPI filed no fewer than two comment letters in the past week. The first, in conjunction with the Financial Services Forum, the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce, asserts the rule “assigns risk weights to bank assets and exposures generally based on no data or analysis; ignores voluminous data on loss experience held by the agencies and the private sector that could have informed an accurate calibration; fails to consider alternative, more accurate measures of risk, including some negotiated by agency staff at Basel; and ignores altogether a duplicative capital charge imposed by the Federal Reserve through its annual stress test.”

“The only solution to its fatal substantive and procedural flaws is for the agencies to re-propose the rule,” the groups conclude.

But BPI had more to say. In a second comment letter, co-authored with the ABA and nearly rivaling the capital requirements proposal itself in verbosity at 314 pages, took issue with the notion that the rule aims to head off some of the conditions that combined to allow Silicon Valley Bank and others last year to fail.

"Since 2017, there has been no evidence that U.S. banks hold insufficient capital against the four risks addressed in the proposal," BPI and ABA said. "[Silicon Valley Bank] did not fail due to credit, operational, market or [credit valuation adjustment] risk: its borrowers repaid their loans; it suffered no cyber-attack or other operational loss; and it did not trade derivatives or securities."

As for the nuclear option, legal action has the potential to delay finalization of the rule, Mills said. And time, in the face of this November’s presidential election, may not favor regulators if there’s a change in power at the White House.

Even left-leaners are upset

5. Advocates of diverse homeownership

The Congressional Black Caucus, the National Urban League and the NAACP, among others, have raised concerns about the availability of certain mortgages for riskier homebuyers. The plan would force banks to hold more capital for mortgages with higher loan-to-value ratios. That, the National Housing Conference wrote in a comment letter seen by The Wall Street Journal, would “have a devastating impact on our efforts to increase homeownership in communities of color.”

The National Community Reinvestment Coalition suggested the Fed walk back its mortgage-related risk weightings to the Basel’s standard. “If risk weightings for high loan-to-value mortgage loans held for investment increase dramatically, it may make banks more hesitant to extend mortgage loans to the types of borrowers — typically lower-wealth, lower-income, and of color — who make smaller down payments," the NCRC said in its letter. "The agencies should adopt the effective but less punitive risk weightings called for in Basel III."

A group of Democratic senators led by Chris Van Hollen of Maryland raised concern that the proposal would have a "chilling effect on clean energy financing across the country.”

"Several institutions are beginning to shy away from tax equity-funded clean energy investments,” Van Hollen and other lawmakers wrote Thursday, according to American Banker.

6. Academics

Another Democratic stalwart, Sen. Kirsten Gillibrand of New York, fell back on the argument that the proposal, if enacted as is, would raise “an issue of American competitiveness.”

Dozen of academics, including Jeremy Kress of the University of Michigan, Todd Phillips of Georgia State University and Saule Omarova of Cornell University, penned a comment letter asserting it was “nonsense” to argue that banks could not afford to lend if they had higher capital requirements, adding that Wall Street’s top four lending banks saw a combined $10 billion increase in net income last year.

The academics said the "real risk to international competitiveness is not stronger capital rules, but rather lax prudential regulation."

“U.S. regulators do not have a statutory mandate to promote the financial services industry’s international competitiveness,” Kress wrote. “They are directed to prioritize the safety and soundness of the US banking system.”

Other regulators

7. Michael Hsu

The Fed is not the only regulator to have had a hand in proposing the capital-requirements revamp. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. partnered on it, too.

Michael Hsu, acting chief of the OCC, told the Financial Times he has seen no evidence that the new rules would make lending to nonwhites or small-business owners more expensive.

“I’m hopeful that folks have included that analysis because if banks are saying it’s really hurting the real economy, but they’re providing increases in their share buybacks, I would suggest that there’s some questions for the bank about what the priorities are with regards to that comment,” Hsu said. “I have encouraged [banks]: Provide analysis on what your share buybacks and dividend policies are going to be under these different scenarios. Because there’s a choice to be made with capital.”

Barr’s colleagues, Part 2

8. Fed Gov. Michelle Bowman

While Waller now appears to be Barr’s most vocal detractor at the Fed (at least on capital requirements), that role had typically been held by Michelle Bowman.

Bowman, for her part, emphasized the value of listening to the banks most affected by the proposal.

"I think it's most effective to understand directly from the financial institutions that are subject to the rule so that they will be the ones making decisions about product costs and availability,” she said Wednesday in a speech to the U.S. Chamber of Commerce. “We have an obligation as policymakers to understand and assess the true cost of reform."

She said she is “cautiously optimistic that policymakers can work toward a reasonable compromise ... that addresses two of the most critical shortcomings of the proposal: Over-calibration and the lack of regulatory tailoring.”

What the U.S.’s other biggest bank says

9. Bank of America

The chief executive at the U.S.’s second-largest bank pointed back at the Fed this week.

“I’ve been doing this for 40 years and I have never seen the board itself out in the open have this much divergence of opinion,” Bank of America CEO Brian Moynihan told Bloomberg on Thursday.

Unlike JPMorgan, BofA made no mention of legal action. However, Moynihan said, he sees a high likelihood that the Fed will make significant changes to the capital-requirements rule as proposed.

“[A] 20% increase to our capital doesn’t seem to make sense given where we are,” Moynihan said.

“Do they have to change it?” Moynihan said of the Fed. “Yes, because I do not think it is the right balance.”

As for whether the rule will see modification or a square-one start-over, that could be a toss-up.

"The Basel III endgame proposal was always going to be softened,” BTIG’s Boltansky said. “But the total tonnage of opposition to this proposal suggests that we could see a re-proposal rather than a softening through the final rule."

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