By Pete Schroeder
WASHINGTON, Aug 27 (Reuters) – Wall Street’s most powerful banks fought side by side for years to relax capital rules, but with victory in sight, that alliance has fractured.
As the Federal Reserve wraps up a sweeping overhaul of capital rules, JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley are feuding over a tweak with billions of dollars at stake, according to public documents and four people familiar with the matter.
At issue is a capital surcharge the Fed imposes on global systemically important U.S. banks, or GSIBs. In March, the central bank proposed changes it said would make the surcharge more risk-sensitive by, among other changes, revising how it treats short-term wholesale funding, such as repo and commercial paper, which regulators say is prone to drying up during market stress.
That came as a surprise to executives at JPMorgan and BofA, the two largest U.S. lenders with ample deposit funding, because it would benefit commercial rivals Morgan Stanley and Goldman Sachs, which are more reliant on short-term wholesale funding, the people said. To JPMorgan and BofA executives, that expected outcome seemed at odds with the key reason Republican President Donald Trump’s regulators have argued for capital relief — to boost lending to the real economy.
Generally speaking, a bank’s capital level helps determine how much lending and trading it can support, and how much cash it can return to shareholders.
While the proposal overall reduces the banks’ capital requirements, JPMorgan estimated in a June letter to the Fed that it would miss out on $13 billion in extra capital relief due to the funding tweak, while BofA would miss out on $9 billion. Goldman and Morgan Stanley, meanwhile, would both realize an additional $1 billion to $2 billion in relief, JPMorgan said. Washington advocacy group Better Markets has similarly concluded that Goldman and Morgan Stanley stand to benefit most.
That divergence has sparked last-minute infighting among the Wall Street giants, potentially complicating the Fed’s effort to finalize the reforms before next year when Democrats are expected to have control of the House of Representatives and intensify oversight of Trump’s regulators.
“They’re going to have to choose,” said Christopher Appel, director of banking policy at Better Markets, referring to officials at the Fed where he worked from 2019 through March. Appel was one of many Fed officials who left the central bank this year as the administration overhauls federal agencies.
He said he believes the surcharge is a key remaining safeguard as regulators trim overall capital levels, and that the proposed revision will better gauge funding risks.
“It’s absolutely critical that the Fed get this right.”
Spokespeople for the Fed, JPMorgan, Goldman and Morgan Stanley declined to comment. BofA supports changes “that drive Main Street lending, job creation, and affordability,” a spokesperson said.
LAST-MINUTE FED JOCKEYING
To be sure, the banks support the Fed’s capital overhaul, but see a rare opportunity to maximize their gains, the people said.
JPMorgan and BofA executives have been lobbying Fed officials, sometimes in joint meetings, to spike the proposed change, according to the people. The banks’ chief argument is that the new formula could crimp their lending and potentially hurt the economy, while boosting riskier trading activity, according to the people and public comments.
“As proposed, the Federal Reserve would incentivize trading activity over lending to small businesses and customers,” JPMorgan’s business banking chief Stevie Baron wrote in a blog last week.
Goldman and Morgan Stanley, meanwhile, are pushing the Fed to quickly finalize the change, according to the people and the banks’ comment letters, in which they likewise argue it would improve the rule’s risk sensitivity.
JPMorgan and Morgan Stanley executives have met with Fed officials to discuss the GSIB proposal at least four times each since March, public Fed memos show.
The four sources, who asked for anonymity to discuss sensitive regulatory issues, said it was unclear who will win out. Fed Vice Chair for Supervision Michelle Bowman has told banks to limit feedback, Reuters reported, and three of the people said they believe she will stick closely to the current draft, in part because she wants to wrap up the rule by year-end.
BANKS FOUGHT FOR YEARS TO REVISE THE SURCHARGE
The Fed developed the GSIB surcharge following the 2007 to 2009 financial crisis. It initially comprised five systemic risk factors of 20% weights, including short-term wholesale funding.
Together, GSIBs pushed for years to revise the rule, arguing it was too stringent and inadequately measured risk. But that effort only gained ground when the Fed launched a broad review of capital rules in 2022, sparking an unprecedented and united industry backlash that led the central bank to propose changing the surcharge and easing other planned capital rules.
Currently, the Fed measures short-term wholesale funding as a ratio of risk-weighted assets. While that helped normalize comparisons across GSIBs, it pushed the weighting of short-term wholesale funding in the overall calculation to roughly 30%. To correct that, the Fed has proposed scrapping the ratio, and instead simply measuring absolute short-term wholesale funding exposure.
That’s a win for GSIBs with high ratios. According to 2026 federal data, short-term wholesale funding accounted for 37% of Morgan Stanley’s liabilities, and 30% for Goldman Sachs. For BofA, that figure was 24%, and 21% for JPMorgan.
Morgan Stanley has been particularly active in pushing for the funding tweak, said two of the people. In its comment letter, it said the change could boost liquidity in the Treasury market, which helps set lending rates, by reducing the amount of capital banks must set aside to deal in government bonds.
Goldman Sachs argued in its letter that the change “would result in a more transparent and economically grounded measure.”
(Reporting by Pete Schroeder; additional reporting by Nupur Anand; editing by Michelle Price and Nick Zieminski)
