Banking agencies propose stricter capital requirements, seek comments by Nov. 30

Fed also issues G-SIB proposal to improve risk measurement

Proposed revisions to regulatory capital requirements for banking organizations with $100 billion or more in total assets were issued jointly Thursday by the Federal Deposit Insurance Corp. (FDIC), Federal Reserve Board, and Office of the Comptroller of the Currency (OCC).

The agencies said the proposed changes, out for comment until Nov. 30, are intended to “improve the resilience of the U.S. banking system by modifying capital requirements for large banking organizations to better reflect their risks and apply more transparent and consistent requirements across large banking organizations.”

Billed largely as a way to implement the Basel III “endgame” (a second set of Basel III proposals that were released in 2017), but also responding to the failure this spring of three mid-size banks, the proposals would, according to an interagency overview:

  • Improve consistency of risk measurement in the capital rule for large banking organizations. Internal-models-based capital requirements for credit and operational risk currently included in Category I or II capital standards would be replaced with new, risk-sensitive standardized requirements (the “expanded risk-based approach”) for all banking organizations with $100 billion or more in total assets (those subject to Category I, II, III, or IV capital standards).
  • Apply the capital standards for large banking organizations to a broader set of large banking organizations. All banking organizations with $100 billion or more in total assets would be required, among other things, to reflect unrealized gains and losses on available-for-sale securities in regulatory capital to better reflect actual loss-absorbing capacity; and meet the supplementary leverage ratio requirement and apply the countercyclical capital buffer, if activated.
  • Maintain stricter standards for the largest, most systemic banking organizations. U.S. global systemically important bank holding companies (U.S. G-SIBs) would continue to be subject to a risk-based capital surcharge, and Category I banking organizations would continue to be subject to the enhanced supplementary leverage ratio.
  • Increase transparency of capital requirements across large banking organizations. The use of standardized approaches and enhanced public disclosures, the agencies said, would increase the comparability and transparency of large banking organizations’ capital requirements.
  • Maintain two methodologies to determine risk-based requirements. The proposal would maintain the capital rule’s dual-requirement structure. It would require large banking organizations to calculate two risk-weighted asset amounts – one under the current standardized approach, the second under the expanded risk-based approach – and to use the higher of the two to satisfy minimum capital requirements. The agencies said this approach would continue to ensure that the capital requirements applicable to large banking organizations are at least as strict as those applicable to smaller banking organizations.

The proposal includes a three-year transition period that begins in 2025.

Both the FDIC and Fed Board met Thursday on the proposed rule changes. The proposal for comment was issued on a vote of 4-2 at the Fed (with Govs. Michelle Bowman and Christopher Waller dissenting); at 3-2 at the FDIC (with Vice Chairman Travis Hill and Board Member Jonathan McKernan dissenting).

The Fed Board separately, and unanimously, on Thursday also issued a proposal to improve the precision of the G-SIB surcharge and better measure systemic risk; comments are due Nov. 30.

Release: Agencies request comment on proposed rules to strengthen capital requirements for large banks

Interagency overview of the proposed capital rule changes

Notice for Federal Register, Proposed regulatory capital rule changes

Notice for Federal Register, G-SIB proposed rule