Wall Street Braces for Impact as US Regulators Consider Overhaul of Tax-Equity Investing Rules

Senior bankers on Wall Street are cautioning against a proposed overhaul of tax-equity investing rules by US regulators, foreseeing a significant impact on a market primarily controlled by JPMorgan Chase & Co. and Bank of America Corp.

The focal point is the perceived risks associated with tax-equity investments, where banks supply capital to green projects in exchange for tax credits.

JPMorgan and BofA are estimated to account for over 50% of the approximately $20 billion annual transactions in this market.

Basel 3 Endgame and Regulatory Background

In July, the three entities overseeing US bank capital requirements—the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency—introduced the Basel 3 Endgame. 

The objective is to conclude a comprehensive regulatory overhaul initiated after the 2008 financial crisis, ensuring sufficient bank capital for future market downturns.

A component of this proposal mandates banks to quadruple the risk weights assigned to tax-equity investments, compelling them to increase the capital reserved for renewable energy projects significantly.

Industry Response and Concerns

Dermot McDonogh, CFO at Bank of New York Mellon Corp., expressed in a written consultation response that if the rule proceeds, it will “severely reduce” or even “eliminate” banks’ capacity to invest in renewable energy projects.

This assessment aligns with concerns voiced by the clean energy industry and legal experts. Clifford Chance, a law firm, cautioned that the risk-weight proposal could make certain tax-equity investments “prohibitively expensive,” leading to a detrimental impact on green finance. ACORE, a trade group for renewable project developers, warned of a potential setback to the transition to clean energy.

Banks’ Reactions and Earnings Calls

Major banks such as Bank of America and JPMorgan declined to comment on the matter. During an earnings call, JPMorgan’s CFO, Jeremy Barnum, urged regulators to be aware of the consequences of the proposed rule, suggesting a reconsideration of such deals.

Wall Street has strongly criticized the broader Basel 3 Endgame proposal, anticipating adverse effects on various sectors, including mortgage lending and small-business loans. Bankers expect the planned risk-weight rules to undermine many of the green tax credits streamlined by the Biden administration’s landmark climate law.

Opposition to the proposed regulations is so intense that there’s speculation the regulators may need to make changes before proceeding, according to industry executives. Wall Street’s hope is for a complete revision or substantial reworking of the proposal.

CEO and Expert Opinions

Jane Fraser, CEO of Citigroup Inc., expressed hope for revisions when discussing the planned risk weights in connection with the bank’s quarterly results. Investment advisory firm Capstone underscores tax-equity investments as a crucial source of financing for clean energy projects, especially after the passage of the Inflation Reduction Act in August 2022.

Adam Gilbert, a partner at PwC and former head of regulatory policy at JPMorgan, questions the logic of making clean energy projects more capital-intensive, potentially reducing their attractiveness from a business and economic standpoint. He emphasizes that relying on less stable financiers to fill the gap created by the proposed regulations could be less reliable than banks themselves.