The FDIC, Federal Reserve and Office of the Comptroller of the Currency proposed new capital requirements for banks with more than $100 billion in assets. The proposal would implement the so-called “Basel III endgame” standards while eliminating the practice of relying on banks’ internal risk models. If implemented, the new rules would go into effect over three years starting on July 1, 2025. Public comments on the proposal are due Nov. 30.
The proposed rulemaking would raise capital by an average of 16%, according to estimates offered by the Fed Vice Chairman for Supervision Michael Barr. It seeks to establish a more consistent set of capital requirements across larger banks following the economic turmoil caused by the failures of Silicon Valley Bank and Signature Bank in March. Banks with more than $100 billion would be required to include unrealized gains and losses from certain securities that are “available for sale” in their capital ratios; to comply with the supplementary leverage ratio requirement; and to comply with the countercyclical capital buffer, if activated. (For banks below $100 billion in total assets, the market risk provisions of the proposal would also apply to those with $5 billion or more in trading assets plus trading liabilities, or for which trading assets plus trading liabilities represent 10% or more of total assets.)
The Fed also voted in favor of a separate but related proposal concerning changes to the calculation for the surcharge for global systemically important banks, which must maintain additional capital buffers. Among other things, the proposal would make changes in the measurement of some systemic indicators to improve how the surcharge reflects risk, according to Fed staff.
Proposed requirements divide Fed, FDIC
The decision by federal agencies to move forward with new capital requirements for large banks wasn’t unanimous, with dissenters on both the Fed and FDIC boards saying regulators were pushing for a one-size-fits-all approach that has been previously rejected by Congress. The FDIC board voted 3-2 in favor of the proposal while the Fed board voted 4-2 in favor. Among the supporters on the FDIC board was Chairman Martin Gruenberg, who said that history has demonstrated that troubles at individual banks can shake the overall stability of the U.S. banking system, particularly problems at large banks.
“Strengthening capital requirements for large banking organizations better enables them to absorb losses with reduced disruption to financial intermediation in the U.S. economy,” Gruenberg said. “Enhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs including potential costs to the Deposit Insurance Fund.”
However, FDIC Vice Chairman Travis Hill and Board Member Jonathan McKernan voted against the new standards. Hill said the rules effectively lumped several categories of banks into a single regulatory scheme, which runs counter to congressional intent as expressed in a 2018 law that directed banking agencies to tailor regulation to institution size. “It is further a troubling sign for future policymaking, a signal that regulators intend to treat all large banks alike, in defiance of congressional directives and in contradiction to the objective of a diverse banking sector with banks of varying sizes, niches and business models,” Hill said. McKernan questioned the lack of rationale behind the Basel Committee’s standards and the singular focus on raising capital levels without assessing the potential costs.
Fed Governors Michelle Bowman and Christopher Waller also cast dissenting votes. Like Hill, Bowman expressed concerns about the lack of tailoring in the proposal, but she also questioned the focus on capital in regulators’ response to the SVB and Signature failures. Even Fed Chairman Jerome Powell, who voted to approve the proposal, expressed caution. “U.S. and global regulators raised large bank capital requirements significantly in the wake of the global financial crisis,” he said in a statement. “While there could be benefits of still higher capital, as always we must also consider the potential costs.”
“While there’s more than about the recent bank failures, it seems apparent that these failures are caused primarily by poor risk management and deficiency, not by a lack of capital,” Bowman added. “I’m concerned that today’s proposed rule and other yet-to-be-proposed regulatory changes will add to the challenges facing the U.S. banking system and impose real costs on banks, their customers and the economy without commensurate benefits to safety and soundness or to financial stability.”
ABA: Proposed requirements fail to account for banking sector’s strength
The proposed capital requirements reforms unveiled yesterday fail to appreciate the negative economic consequences that come with forcing already strong banks to hold more capital than what is needed to maintain safety and soundness, American Bankers Association President and CEO Rob Nichols said. “Far from simply meeting international standards, these changes will require banks operating in the U.S. to meet even higher capital levels without any justification, and the proposal effectively rolls back regulatory tailoring that Congress approved on a bipartisan basis,” he said.
Nichols noted that regulators have repeatedly stated that the U.S. banking system is well-capitalized. He also pointed out that banks have weathered recent economic headwinds while continuing to provide critical support to their customers and communities.
“This unnecessary and overly broad proposal puts economic growth and resiliency at risk by restricting credit availability for businesses and other borrowers, as dissenting voices at the FDIC and Fed noted today,” Nichols said. “Asking banks to hold more capital than necessary carries real costs for everyday Americans.”
