(Bloomberg) -- Wall Street’s biggest banks are preparing for new regulations that could erase almost all of the $118 billion in excess capital they squirreled away over the past decade, likely crimping shareholder buybacks for years to come. 

The Federal Reserve and the Federal Deposit Insurance Corp. will vote on Thursday to propose the measures during two separate open meetings, marking the first hurdle in putting the US on track to adopt its final version of international banking standards known as the Basel III endgame. Ahead of the meetings, both regulators, along with the Office of the Comptroller of the Currency, plan to release hundreds of pages of documents detailing the changes.  

“There’s certainly a great deal of angst from investors around these expected proposals,” Jason Goldberg, an analyst at Barclays Plc, said in an interview. “Share repurchases could be lower than desired in the near term. Ultimately we would expect the group to adapt and move forward.”

The changes are part of a sweeping review that Michael Barr began as one of his first acts as the Fed’s vice chairman for supervision. Taken together, they mark the biggest revamp of capital rules for US banks since the aftermath of the financial crisis. Though the proposals likely won’t be implemented for years, they have already drawn criticism from top bank executives, who say the plans could make them less competitive against European rivals and buyout giants such as Apollo Global Management Inc. and Blackstone Inc.  

In the meantime, investors are increasingly worried about how the stricter requirements will affect lenders’ ability to repurchase shares.

Six of the country’s biggest banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. — are currently sitting on an estimated $118 billion in so-called excess common equity tier 1 capital, according to Bloomberg Intelligence. But that cushion would be almost completely wiped out if Barr implements proposals that would result in the equivalent of an additional two percentage points of capital, Bloomberg Intelligence found.

“The guys that will be extra penalized will be the Wall Street banks,” Arnold Kakuda, an analyst with Bloomberg Intelligence, said in an interview. Trading businesses “will be hit especially hard.” 

The Fed said that banks affected by the changes would be able to build up the required amount of capital in less than two years even if they continued paying out dividends, assuming they keep earning money at the same rate as they have in recent years. 

But an analysis by Morgan Stanley found that only JPMorgan and Bank of America could meet that timetable, with Citigroup taking more than four years to do so and Goldman more than three years. Bloomberg Intelligence said the proposals will likely result in stingier buybacks and dividends until 2025 at the earliest.

Barr has said he will propose “minimal” adjustments to capital surcharges affecting the eight US firms that qualify as “global systemically important banks.” 

He also has said he’s planning to recommend to the agencies that his stricter capital rules apply to all banks with $100 billion or more in assets, which is a lower threshold than the agency currently uses. That means banks including Regions Financial Corp., KeyCorp and Huntington Bancshares Inc. could face a bevy of new rules in coming years.

US bank regulators’ latest draft included requirements for large lenders’ residential mortgages that go beyond international standards, Bloomberg News previously reported. The measure under consideration would raise the so-called risk weights for many residential mortgages, meaning they would play a more significant role in determining overall capital requirements.

Dimon’s Take

Banks in recent weeks have said they won’t be shy about responding to Barr’s proposal, which is expected to be accompanied by the Fed’s lengthy notice-and-comment rulemaking process. Barr himself said this month that implementing the proposed changes would “take at least several years.” 

Executives at JPMorgan said this month that they would likely have to raise prices for products most affected by the changes. That probably means non-bank players such as private equity firms would be able to step in and pick up market share. 

“This is great news for hedge funds, private equity, private credit, Apollo, Blackstone,” JPMorgan CEO Jamie Dimon told analysts on a conference call earlier this month. “They’re dancing in the streets.”

The Fed’s bank supervision chief has said that while he does see a need to more closely monitor risks outside of the regulated financial sector, he doesn’t believe the answer is lower capital requirements for banks. 

“As stress in non-bank financial markets is often transmitted to the banking system, both directly and indirectly, it is critical that banks have enough capital to remain resilient to those stresses,” Barr said this month. 

Fewer Options

In some cases, bank executives have argued that the new rules could limit banks’ ability to offer low-cost loan options to borrowers.

“We share the concern that higher capital levels will undoubtedly increase the cost of capital for medium and smaller-sized enterprises and consumers in particular, and will drive more activity to non-regulated and lesser-capitalized players,” Citigroup Chief Executive Officer Jane Fraser warned shareholders this month. “That isn’t in the system’s interest.” 

Morgan Stanley plans to be vocal in its opposition to certain elements of the Fed’s proposals, executives have vowed. CEO James Gorman said he takes issue with proposals that would penalize banks for certain types of fee income. 

“You don’t build fee-based businesses to create operating risk, you build them to create stability,” Gorman told analysts on a conference call. “It’s kind of hard for me to sit here and say that we won’t be commenting forcefully that we are very well capitalized.”

--With assistance from Stephanie Stoughton.

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