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Lighter Capital Rules, Outlined in New Report, Would Prompt ‘Much Greater’ Stock Buybacks

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Lighter Capital Rules, Outlined in New Report, Would Prompt ‘Much Greater’ Stock Buybacks

A press report saying U.S. regulators might water down a controversial proposed overhaul of banks’ capital requirements is making the rounds on Wall Street. Analysts say that if it happens, the implications would be largely positive for lenders.

Bloomberg reported on Monday that the Federal Reserve has shown other U.S. regulators a document of possible changes to a proposal that aims to revamp banks’ capital requirements. The revisions would “walk back key parts of the landmark proposal,” Bloomberg said, citing people familiar with the matter.

The Fed is set to release the results of its annual bank stress tests after the stock market closes on Wednesday. How the banks fare on those tests ties directly to capital requirements for lenders, which draw a lot of attention because they help determine how much money the companies can hand back to shareholders via dividends and buybacks of stock.

Bloomberg reported that the document didn’t include updates on how much additional capital big banks would have to hold on their balance sheets, but sources the report cited said that “early calculations suggest the proposed changes could lead to an increase as low as 5%,” down from a 16% increase in the initial proposal.

This would be a “strong positive for the industry,” J.P. Morgan analysts led by Vivek Juneja wrote in a note to clients on Tuesday.

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The possibility of more bank-friendly rules would prompt “much greater share buybacks at some banks,” especially at the largest lenders with bigger trading businesses, Juneja wrote.

The Bloomberg report noted that the Fed said in a statement: “The Federal Reserve has made no decisions on timing, process, or substance. The Fed is not targeting a specific range, but is instead focused on the substance of potential changes.”

Banks including

JPMorgan Chase
,

Wells Fargo
,

and

Bank of America

have been fighting against the particulars of the proposal—a hotly debated overhaul known as Basel III Endgame—since regulators released it a year ago.

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Banks argue that holding significantly greater amounts of capital is unnecessary and could restrict their ability to lend to small businesses, while advocates of tighter capital rules say the higher requirements would keep banks and customers’ money safe and help lenders to ride out economic downturns.

“The only cutbacks banks will be forced to make if the Basel rules are finalized will be payments to their investors and executives,” Sen. Elizabeth Warren, Democrat of Massachusetts, said in a statement last week.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com

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