Regulators in the United States are preparing to draft a rule that will likely dramatically increase the capital requirements for larger banks, requiring them to reduce expenses and hold onto profits in an effort to protect against future losses that would affect clients and investors.

US regulators to unveil plan to build cash reserves

The proposal, which will be unveiled later on Thursday and put to a vote by the Federal Reserve and the Federal Deposit Insurance Corporation, is the first step in a major attempt to tighten bank supervision, particularly in the wake of the turmoil that saw three major financial firms fall in the spring.

The rule would put into effect a 2017 agreement reached by international regulators and seeks to change how banks determine their level of risk and, consequently, the amount of cash they must hold in reserve.

As banks attempt to weaken, postpone, or otherwise thwart the government’s carefully thought-out initiative, industry opponents have already started to criticise the plan. They claim the increases are unreasonable and detrimental to the economy.

“It’s likely that the banking industry didn’t have as big of an impact on the impending plan as it had hoped. But it’s determined to battle on what it considers to be important problems between Thursday and whenever a final regulation is finalized,” said Ian Katz, managing director at Washington-based Capital Alpha Partners, in a research note.

Top bank executives have expressed concern that tougher regulations may compel them to reduce services or raise prices. Banks like JPMorgan Chase and Morgan Stanley have issued similar warnings. According to analysts, it might require years of retained earnings to comply, which would limit their capacity to increase dividends or buy back shares.

Bank authorities seek to improve the way companies analyze their risk in lending, trading, and internal operations. This plan is anticipated to be lengthy and detailed. Through the Basel Committee on Banking Supervision, the proposal would have U.S. authorities put into effect a previous international agreement.

Vice Chair of the Fed for Supervision Michael Barr, who is in charge of the endeavor, stated that he will also push for stronger regulations for companies with assets of above $100 billion, which may include banks like Citizens Financial Group, Fifth Third, Huntington, and Regions.

Barr, a Democrat appointed by President Joe Biden, has argued that banks need larger reserves to guard against unanticipated risks, such as when some banks crumbled earlier this year under significant unrealized losses when interest rates rose, forcing government regulators to intervene to protect depositors.

Dennis Kelleher, president and CEO of Better Markets, an organisation that supports stricter financial regulations, said that “bank capital is critical.” However, boosting compensation on Wall Street depends on decreasing capital, which is why Wall Street seeks to stop regulators from forcing them to have enough capital.