Regulatory capital rules are on the discussion agenda of the Federal Deposit Insurance Corp. (FDIC) Board meeting slated July 27, marking a step forward in banking regulators’ plans to issuing joint proposed rules for implementing the Basel III “endgame.”
These “endgame” proposals seek to reduce the variability of risk-weighted assets and address certain weaknesses that were identified during the global financial crisis, according to remarks in June by FDIC Chairman Martin Gruenberg that pointed to joint proposed rules to come from his agency, the Federal Reserve, and the Office of the Comptroller of the Currency (OCC).
Speaking to the Peterson Institute for International Economics, Gruenberg said the stated objective of the final Basel III revisions “address the calculation of risk-weighted assets and limit the extent to which banks can use internal models to estimate risk to calculate minimum capital requirements.”
The FDIC chairman said the Basel III endgame focuses on four critical areas of risk: credit risk, market risk, operational risk, and risk associated with financial derivatives. He also said that community banks, subject to different capital requirements, would not be affected by the proposal, given their limited overall size and trading activities.
The Basel III endgame proposals are coming 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. Gruenberg, in his June speech, noted that the Basel III framework, had it been in place, might have helped mitigate the conditions that led to the SVB failure.
“Had the unrealized losses on available for sale securities on the balance sheet of SVB, that were realized once sold, been required to be recognized in capital, as the Basel III framework would do, it might have averted the loss of market confidence and the liquidity run,” he said. “That is because there would have been more capital held against these assets.”
The FDIC Board’s discussion Thursday will focus on regulatory capital rule amendments applicable to banking organizations subject to category I, II, III or IV standards, and to banking organizations with significant trading activity. The board is scheduled to meet at 10 a.m., three hours before the Federal Reserve Board is slated to meet also on proposed capital rule changes.
At that 1 p.m. meeting, the Fed Board is expected to issue proposed rules to implement the Basel III endgame agreement for large banks as well as adjustments to the surcharge for U.S. global systemically important banks (G-SIBs).
Both Gruenberg and Fed Vice Chair for Supervision Michael Barr have indicated the agencies are looking to apply the proposed rules to banking organizations with $100 billion or more in assets.