(Bloomberg Opinion) — The Federal Reserve is aiming to lessen the costly fluctuations in bank capital demands created by its annual stress tests. But big lenders are pushing for more relief while the central bank is politically weakened and some board members seem keen to please the White House. The Fed must be careful not to give away too much bit by bit by tackling several different regulatory changes in a piecemeal way. A gathering of industry leaders and regulators next month to discuss an integrated review of large banks’ capital requirements, which was announced by the Fed on Thursday, is the place to start. Financial safety is vulnerable right now. President Donald Trump favors looser regulation in the hopes of promoting growth and squashing what Republicans see as a political focus on climate risks and diversity efforts. At the same time, Trump is trying to undermine Fed independence by hounding Chair Jerome Powell to lower interest rates. Key board members have recently backed early cuts. Powell himself has also had to eat humble pie over perceived overreach by bank supervisors to influence industry lending decisions through the prism of reputational risk – he has now ordered that be removed from bank assessments. The central bank also stumbled badly in its attempt to update US capital rules and bring them into line with the international Basel standards, which led to a humiliating climbdown by American regulators last year. This year’s stress test results are due out today and the Fed might also update markets on plans for the first change to how the outcomes apply to banks. Since 2020, the results of this test are used to calculate between a quarter and a half of big banks’ minimum capital requirements, but because the tests are different each year the amounts involved have varied wildly. JPMorgan Chase & Co., Goldman Sachs Group Inc. and the rest have seen their capital needs fluctuate by billions of dollars. Rulemakers at the Fed, sympathetic to complaints about the costs and uncertainty, are planning to start using an average of two years’ results to limit the variation. Normally, banks must meet their new requirement three months after it is set: by October after results are released each June. The industry wants a phase-in period to the end of the year. This sensible smoothing could aid banks’ planning without undermining the safety of the system. However, lobby groups such as the Financial Services Forum, which represents the eight biggest lenders, and the Bank Policy Institute want more. First, they’ve asked that banks be allowed to take the full benefit of any cut in requirements, while using averaging to limit any increase. The argument is that the cost of adding capital is asymmetric and so there’s a justification in making the averaging asymmetric too. Obviously, this is self-serving. It will tend to favor moves toward less capital over time. 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Strategies to Prevent Bank Security from Gradually Deteriorating
