Wall St banks turn on each other as capital fight nears endgame

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.