Wall Street Banks Split Over Capital Rules as Fed Decision Nears

Introduction

A major disagreement is emerging among some of America's biggest banks as the Federal Reserve moves closer to completing a broad overhaul of bank capital rules. For years, leading Wall Street institutions largely stood together in arguing that capital requirements should be adjusted. Now, with changes appearing increasingly likely, that unity has begun to break down.

At the center of the dispute is the capital surcharge applied to global systemically important banks, commonly known as GSIBs. The Federal Reserve has proposed changing how short-term wholesale funding is treated in the calculation. Although the wider reform could reduce capital requirements for large banks, the proposed funding adjustment would not affect every institution in the same way.

JPMorgan Chase and Bank of America believe the change could leave them with considerably less capital relief than they expected. Goldman Sachs and Morgan Stanley, which depend more heavily on short-term wholesale funding, stand to benefit more from the proposed formula.

The disagreement highlights an important issue in modern banking: how regulators should balance financial stability, lending capacity, market liquidity and the different business models used by major banks.

What Is Behind the Dispute?

The Federal Reserve's capital framework is designed to make sure banks have enough financial resources to absorb losses during periods of stress. Large banks considered systemically important face additional requirements because problems at one of these institutions could have wider consequences for the financial system.

The GSIB surcharge was developed after the 2007–2009 financial crisis. Its purpose is to require the largest and most interconnected banks to maintain additional capital against risks that could threaten financial stability.

The current debate focuses on how short-term wholesale funding is incorporated into that surcharge.

Short-term wholesale funding includes sources such as repurchase agreements, commonly called repos, and commercial paper. These forms of financing can be important to financial institutions, but regulators consider them vulnerable because funding can become difficult to obtain during periods of market stress.

The Fed's March proposal seeks to make the calculation more sensitive to the actual risks associated with this type of funding.

Why the Four Banks See the Proposal Differently

The disagreement largely reflects differences in how the banks finance their businesses.

JPMorgan and Bank of America have substantial deposit bases. Goldman Sachs and Morgan Stanley rely more heavily on short-term wholesale funding.

According to 2026 federal data cited in the Reuters report, short-term wholesale funding represented about 37% of Morgan Stanley's liabilities and 30% of Goldman's. The corresponding figures were approximately 24% for Bank of America and 21% for JPMorgan.

That difference matters because changing the way wholesale funding is measured can redistribute the benefits of capital reform among banks.

JPMorgan has estimated that it could receive about $13 billion less in additional capital relief because of the funding change. Bank of America has estimated a potential difference of around $9 billion. Goldman Sachs and Morgan Stanley, by contrast, could each receive an additional $1 billion to $2 billion in relief under the proposed approach.

Those figures help explain why a previously united group of banks is now divided.

Why JPMorgan and Bank of America Are Objecting

JPMorgan and Bank of America argue that the proposed formula could create incentives that do not match the broader economic objectives of capital reform.

Their concern is that banks could find certain trading and market activities relatively more attractive than traditional lending.

JPMorgan has argued that the proposal could discourage lending to small businesses and customers while providing incentives for trading activity. From this perspective, the issue is not simply about how much capital an individual bank saves. It is also about what banks are encouraged to do with that capital.

For large commercial banks with significant consumer and business lending operations, the distinction is important.

Capital is an essential resource for banks. Generally, the amount of capital a bank must maintain affects how much lending, trading and other activity it can support. It can also influence the amount of money available for shareholder distributions.

JPMorgan and Bank of America therefore want the Federal Reserve to reconsider the proposed treatment of wholesale funding.

Why Goldman Sachs and Morgan Stanley Support the Change

Goldman Sachs and Morgan Stanley have a different perspective.

Because they depend more heavily on short-term wholesale funding, the proposed adjustment could produce a larger reduction in their capital burden.

Both firms have argued that the change would improve the way the GSIB surcharge measures risk.

Morgan Stanley has also argued that reducing the capital burden associated with Treasury market activity could improve liquidity in the government bond market. The Treasury market plays an important role in global finance and helps influence borrowing costs across the wider economy.

Goldman Sachs has similarly supported the proposal on the grounds that it would create a clearer and more economically meaningful measure.

In other words, the two banks see the proposed change less as a special advantage and more as an improvement to the way regulatory risk is measured.

The Bigger History Behind the Capital Reform

The current dispute is the latest stage of a much longer debate.

Large banks have spent years seeking changes to the GSIB surcharge, arguing that the existing system can impose capital requirements that do not always reflect differences in business models or actual risk.

The issue gained new momentum after the Federal Reserve began a broader review of capital rules in 2022.

The banking industry's response to proposed reforms was unusually coordinated. Major institutions argued that some planned requirements were too restrictive and could limit lending and other financial activity.

The Federal Reserve subsequently moved toward a broader overhaul.

Yet once the reforms began to offer different benefits to different banks, the industry's common position became harder to maintain.

That is a familiar pattern in financial regulation. Institutions can agree on reducing a broad regulatory burden while disagreeing strongly about how the savings should be distributed.

What the Federal Reserve Is Considering

The Federal Reserve now faces a difficult balancing act.

On one side, regulators want capital requirements to accurately reflect the risks created by different types of banking activity. On the other, they must consider whether changes could weaken safeguards that became more important after the global financial crisis.

The current proposal would change the way short-term wholesale funding is incorporated into the GSIB calculation.

Under the existing framework, short-term wholesale funding is measured as a ratio related to risk-weighted assets. The proposed approach would instead focus on the absolute amount of such funding.

That technical change can have significant consequences because banks have very different balance sheets and funding structures.

The Year-End Deadline Matters

The timing adds another layer to the debate.

The Federal Reserve is seeking to complete the broader capital overhaul before the end of the year. The Reuters report says officials appear inclined to remain close to the current proposal, although the final outcome remains uncertain.

The regulatory environment could also become more politically complicated next year, with Democrats expected to control the House of Representatives and increase scrutiny of the administration's financial regulators.

That gives the Fed an additional reason to finish the rules while the current regulatory approach remains in place.

What Could the Decision Mean for Banks?

The final decision could have different consequences across Wall Street.

If the proposed funding change remains largely intact, Goldman Sachs and Morgan Stanley could receive a comparatively greater reduction in their capital requirements. JPMorgan and Bank of America would still benefit from the wider capital reforms but could receive less additional relief than they otherwise expected.

If the Fed changes the formula after considering objections from JPMorgan and Bank of America, the distribution of benefits could shift.

For investors, the issue is relevant because capital requirements can influence profitability, lending capacity, trading activity and shareholder returns.

However, the impact should not be viewed simply as a question of which bank receives the biggest regulatory benefit. The underlying purpose of capital rules is to ensure that banks remain resilient when markets become unstable.

What It Means for the Broader Economy

The debate also extends beyond Wall Street.

Banks are major providers of credit to households and businesses. If capital rules significantly affect lending decisions, changes in regulation can eventually influence economic activity.

At the same time, financial markets depend on large institutions to provide liquidity, particularly in important markets such as U.S. government securities.

This creates a difficult policy question: should capital rules prioritize traditional lending, market liquidity, or a broader measurement of financial risk?

There is no simple answer.

A rule that reduces capital requirements may give banks more flexibility, but regulators must ensure that the reduction does not leave institutions less prepared for a future shock.

What Investors Should Watch Next

Investors will likely focus on several developments as the Federal Reserve approaches its final decision.

First, the final treatment of short-term wholesale funding will be important. Even a relatively technical adjustment can have meaningful financial consequences for banks with different funding structures.

Second, investors should watch whether the four major banks maintain their current positions or whether negotiations produce a compromise.

Third, the broader capital overhaul will matter. The wholesale-funding provision is only one part of a much larger regulatory framework.

Finally, market participants should pay attention to how banks respond after the rules are finalized. Changes in capital requirements can influence lending, trading, balance-sheet management and capital returns over time.

FAQs

What is the GSIB surcharge?

The GSIB surcharge is an additional capital requirement imposed on banks considered globally systemically important. It was developed after the financial crisis to strengthen the resilience of the largest and most interconnected institutions.

Why are JPMorgan and Bank of America opposing part of the proposal?

They are concerned that the proposed treatment of short-term wholesale funding could reduce the amount of capital relief they receive and potentially create incentives that favor trading over traditional lending.

Why do Goldman Sachs and Morgan Stanley support the change?

Both banks rely more heavily on short-term wholesale funding than JPMorgan and Bank of America. They argue that the proposed formula would make the capital framework more sensitive to risk and could improve market liquidity.

How much money is at stake?

JPMorgan has estimated that it could miss out on roughly $13 billion in additional capital relief and Bank of America about $9 billion. Goldman Sachs and Morgan Stanley could each receive an additional $1 billion to $2 billion under the proposed change.

When could the Federal Reserve finalize the rules?

The Federal Reserve is working toward completing the broader capital overhaul by the end of 2026, although the exact final outcome of the disputed provision remains uncertain.

Conclusion

The split among JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley illustrates how complicated financial regulation becomes when broad reforms reach the final stage.

For years, the major banks shared an interest in reducing capital requirements. Now that the proposed framework is closer to completion, differences in their business models have created competing interests.

The Federal Reserve must ultimately decide whether the proposed treatment of short-term wholesale funding provides a more accurate picture of risk or whether it produces unintended incentives for some of the country's largest financial institutions.

The decision could influence how billions of dollars of capital are allocated across Wall Street. More importantly, it could shape the balance between lending, trading, market liquidity and financial stability in the years ahead.

For investors and businesses, the final rule will be worth watching because capital regulation is not merely a technical issue for banks. It can influence how financial institutions deploy their balance sheets and how effectively they support the broader economy.