Bank regulators should abandon the “flawed” approach of creating two sets of capital standards for large banks and instead propose a single set of modernized standards also available as an option for smaller banks, Treasury Secretary Scott Bessent said.
The Federal Reserve is holding a conference today on large bank capital requirements. In remarks for the event, Bessent characterized the banking agencies’ 2023 proposal to implement the Basel III endgame capital standards as a flawed approach because it would have created two sets of requirements — a “modernized” set and a legacy set. Banks would have been subject to whichever set required them to hold more capital.
“This dual-requirement structure did not derive from a principled calibration methodology,” Bessent said. “It was motivated simply to reverse-engineer higher and higher capital aggregates. It also was at odds with capital reform as a modernization project because it would have preserved the antiquated capital requirements as the binding floor for many, perhaps most, large banks.”
Echoing arguments made by the American Bankers Association, Bessent said that true modernization could benefit banks of all sizes, as it means reduced capital requirements for mortgage loans and some other exposures that are core to the community bank business model.
“We cannot give only large banks the benefit of these reduced requirements, as actually contemplated by the last administration,” Bessent said. “One possible solution would be to give each bank that is not subject to the modernized requirements the choice to opt in. This would result in a meaningful reduction in capital for those banks.”
