Fed poised to take up risk-based capital rules, G-SIB surcharge adjustments in meeting next week

Proposed rules to implement the Basel III endgame agreement for large banks and adjustments to the surcharge for U.S. global systemically important banks (G-SIBs) will be discussed by the Federal Reserve Board during an open meeting July 27, according to a notice slated for publication in the Federal Register Monday.

The proposals come on the heels of this year’s failures of three mid-size banks: Silicon Valley Bank (SVB) and Signature Bank of New York, N.Y., which both failed in March; and First Republic Bank of San Francisco, Calif., which failed in May.

Fed Vice Chair for Supervision Michael Barr discussed the coming proposals in a speech in Washington July 10. In his speech, he outlined the following key points:

  • The new rules would apply to banks and bank holding companies with $100 billion or more in assets. Now, the rules apply to firms that are internationally active or have $700 billion or more in assets. Barr asserted that the $100 billion threshold would subject more banks to the Fed’s most risk-sensitive capital rules compared to the current framework.
  • Stress testing is sound, but it should continue to evolve to better capture risk. Any additional changes, he indicated, should be complementary to the changes to the risk-based capital framework.
  • No changes will be pursued to such capital buffers as the global systemically important bank (G-SIB) surcharge and the countercyclical capital buffer (CCyB). However, he said he recommends that the measurement of systemic indicators under the G-SIB surcharge framework be improved, “cliff effects” be reduced and the sensitivity of the surcharge to changes in a bank’s risk profile be increased.
  • No changes, at least for now, are recommended to the calibration of the enhanced supplementary leverage ratio (eSLR). He said with other changes being proposed, the eSLR generally would not act as the binding constraint at the holding company level, where Treasury market intermediation occurs.
  • Changes to both regulation and supervision will be proposed, including how the Federal Reserve regulates and supervises liquidity, interest rate risk, and incentive compensation. He also said the agency is looking at how to improve its the speed, agility, and force of supervision.
  • Multiple ways for measuring and mitigating risk will be continued, as that makes it helpful for the resiliency of banks and robustness of the banking system. “Further, a capital framework with multiple ways of measuring risk is harder for banks to game,” he asserted.

The Fed Board’s July 27 open meeting, slated for 1 p.m. Eastern, will be viewable in person and via webcast.

Federal Register notice (scheduled Monday, July 24)