When global regulators last year announced final international capital and liquidity standards, bankers for the first time in months breathed a sigh of relief, appearing even to welcome the agreement.
Even though the Basel III framework would be tougher, it was significantly less burdensome than most bankers had expected, and U.S. negotiators acceded to European demands to allow longer transition times in order to give institutions a chance to meet the higher criteria.
But flash forward to today, and large bank executives are sounding considerably less positive about Basel III, warning it could stifle economic growth even as they shed assets in an attempt to comply with regulators' deadlines.
Most observers said the change of heart is mostly due to the Federal Reserve Board's second round of stress tests, which determined which institutions could pay a dividend and effectively forced banks to prove they could meet the new Basel III standards much sooner than expected.
"It really was the first time the rules hit the balance sheet in a nonacademic way," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. "It was a reality check. ... Even though the banks weren't forced to comply with them immediately, they were forced to show how they would by the Dec. 31, 2012 deadline to get permission to pay the dividends or make other capital distributions; and that really forced the hard understanding of the cruel reality that is Basel III."
Under Basel III, banks must hold at least a 4.5% common equity ratio by 2015 and phase in a capital conservation buffer of 2.5% by January 2019.
The Fed's stress test required banks to show a minimum common ratio of 3.5% and a minimum Tier 1 capital ratio of 4.5%.
But the central bank also explicitly said it wanted banks to prove how they planned to comply with the new international accord.
"It is possible that the Federal Reserve may object to a firm's proposed capital actions even though the firm may be able to adequately support some increase distributions, if, for example, the Federal Reserve determines that the firm's capital planning and management process did not fully meet supervisory expectations or its plans for meeting the upcoming Basel III capital standards were not robust," the central bank wrote in its 22-page report released in March.
Results of the stress tests — which included precluding banks like Bank of America Corp. from issuing a dividend in the first quarter — served as a major wake-up call to financial institutions and incited bankers to push back on the new rules.
"The 19 largest U.S. bank holding companies had to run it, and they did with varying success, and in most cases considerable pain," said Petrou.
The result has left bankers stoking fears that it could hurt U.S. banks' competitiveness. Combined with changes made by Dodd-Frank, many are arguing that regulators have gone too far.
"Is it too much? Is it enough?" said Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin-Wallace College. "When a regulator places a standard, that standard can work really well when applied to one bank, but for another bank it may be overkill, and for another bank it may not be enough."
Speaking at the Council of Institutional Investors in early April, Jamie Dimon, JPMorgan Chase's chairman and chief executive, argued that regulators were "getting extreme and excessive."
"I can't prove this right now, but for all the academics here, it will stifle economic growth," Dimon said. "I believe it already is. I believe banks around the world are deleveraging and preparing for the potential impact of Basel III … charges right now."
Observers said it wasn't just Basel III that set Dimon off, but the combined impact of the new rules with Dodd-Frank.
"It's the cumulative onerous effect of the combined regulation," said Gregory Lyons, a partner at Debevoise & Plimpton. "It's becoming more real. Banks are getting farther along in evaluating what this capital means to them, and I also think honestly the absence of integration of Basel III and the U.S. rules is becoming more of a concern as well."
Especially as regulators continue to be reticent in allowing banks to use their own internal models in making capital determinations, banks are hoping for changes to Basel III.
"Banks have become increasingly uncomfortable to the point they don't want to do Basel III unless they absolutely have to," Jacques said. "The fact of the matter is when regulators change capital requirements, banks are going to respond by altering not only their capital levels, but also by altering the composition of their assets."
That has already been the case with Citigroup, which has been speeding up its timetable for shedding assets that will be assigned higher risk weightings in order to be in a better position to achieve Tier 1 capital ratio in the 8% to 9% range next year.
A stronger capital position next year would be especially important as Citi aims to return more capital to shareholders.
"When we looked at where the markets are today, it seemed to be a time when we could take a hit, but it was worth taking the hit now in order to get the Basel III risk-weighting benefit in the future," said Citi Chief Financial Officer John Gerspach on a conference call last week with reporters.
Until recently, Citi was one of the few big banks to criticize Basel III openly. Speaking only a day after the Basel Committee on Banking Supervision released the new standards in September, Bank of America Chief Executive Brian Moynihan said the company was already preparing to raise capital, and did not sound overly worried about the new requirements.
Howard Atkins, the chief financial officer of Wells Fargo, said his company would already be over the 7% minimum common equity ratio before any deductions.
While Dimon vaguely endorsed the new standards at the time, Vikram Pandit, the CEO of Citi, said in November that he was concerned Basel III would impede the flow of credit.
According to Pandit's interpretation of Basel III, bankers' judgment of individual credit profiles will begin to matter less, while quantitative inputs such as FICO scores and credit performance during the recent high-stress period will matter more. The upshot for consumers and small-business owners seeking loans in the age of Basel III will be that "the past literally will count more than the future," Pandit said.
Some observers said bankers were wary of openly opposing Basel III at first because the financial crisis was still fresh in the public's mind.
"The response was somewhat muted simply because they weren't sure how it would be perceived since they were under the microscope given the industry's role in perpetuating or accentuating the crisis in itself," said Alok Sinha, who leads Deloitte's Regulatory and Economic Capital services team and is a principal with Deloitte & Touche LLP.
But as they begin to feel the impact of Basel III and the industry has regained clout on Capitol Hill, the situation has changed.
"With the industry having somewhat recovered and the political winds in Washington having changed a little bit some provisions of Dodd-Frank — interchange fees, Collins amendment — are being scrutinized a little bit more; we see the Street coming out a little bit more strongly," Sinha said. "So I don't think the expectations have changed … but we do see a little bit more overt resistance to the rule."