Three proposals to essentially lower the regulatory capital requirements “for banks of all sizes” was released Thursday by the federal banking agencies.
According to the Office of the Comptroller of the Currency (OCC), the proposals “would improve the calculation of risk-based capital requirements to better reflect the risks of these banking organizations’ exposures and facilitate more effective supervisory and market assessments of capital adequacy.”
The Federal Reserve, in a separate statement, said the proposals would modernize the regulatory capital framework for banks of all sizes and would “streamline capital requirements and better align regulatory capital with risk while maintaining the safety and soundness of the banking system.”
The Federal Deposit Insurance Corp. (FDIC) Board issued the proposals after its meeting Thursday. The agency indicated that the proposals were issued after “experience has demonstrated” that certain parts of the regulatory capital framework adopted following the global financial crisis of nearly 20 years ago “could be improved without reducing safety and soundness.”
The FDIC acknowledged that the proposed changes could result in “a modest decrease” in the overall capital in the banking system. However, the agency asserted, “capital levels would still be substantially higher than they were before the financial crisis.”
“In aggregate, the proposals would modestly reduce capital requirements for large banks and moderately reduce requirements for smaller banks, reflecting their more traditional lending activities,” the FDIC said.
The agency described the three proposals as:
- First: primarily applying to the largest, most internationally active banks, to improve the capital framework by enhancing risk sensitivity, reducing burden, and “improving consistency across banks, as well as implementing the final components of the Basel III agreement.” The FDIC asserted that the capital framework would be streamlined by having these banks use one, rather than two, sets of calculations to determine compliance with risk-based capital requirements. Additionally, the proposal would improve the calibration of the framework to better capture credit, market, and operational risks. “All other banks could choose to adopt this proposed approach,” the agency said. “The market risk aspect of the framework would apply only to banks with significant trading activity.”
- Second: generally applying to all but largest banks. The agency said it would “better align capital requirements for traditional lending activities with risk, while maintaining the framework’s simplicity.” The FDIC said it would reduce “disincentives” for mortgage lending by modifying capital requirements for servicing and originating mortgages. “Proposed modifications for mortgage servicing would also apply to banks that apply the community bank leverage ratio framework,” the agency said. “This proposal would also require certain large banks, subject to a transition period, to reflect unrealized gains and losses on certain securities in their regulatory capital levels.”
- Third: Advanced by the Federal Reserve, it would ostensibly “improve how systemic risk is measured in the framework for determining the additional capital requirement for the largest and most complex banks.”