Federal Reserve Vice Chair for Supervision Michelle Bowman today previewed a series of proposed bank capital reforms she said would reduce capital requirements for large banks by a small amount and result in “slightly larger” reductions for smaller banks.
During a speech at the Cato Institute, Bowman said the Fed board will vote next week on whether to put the proposals out for public comment, with the comment period usually lasting 90 days. She is hoping to implement the proposals “on a relatively short time frame.”
A quick turnaround would be a far cry from 2023, when regulators last sought to modernize the capital framework by implementing the Basel III endgame agreement. That effort stalled after banks and other stakeholders raised numerous concerns about the economic ramifications of heightened requirements. This time around, regulators are taking a “bottom up” approach to ensure the overall framework is appropriate, Bowman said.
“We did not begin by setting an aggregate ‘target’ and working backward,” Bowman said. “Instead, each requirement is evaluated on its merits — examining whether it is properly calibrated to risk, achieves its intended purpose and avoids creating unintended outcomes.”
Four pillars
Bowman said regulators have developed proposals to modify “the four pillars” of the regulatory capital framework for the largest banks: Stress testing, the supplementary leverage ratio, the Basel III framework for risk-based capital requirements, and the G-SIB surcharge.
Regulators have already introduced proposed changes to the enhanced supplementary leverage ratio – as well as the community bank leverage ratio – and the stress testing framework, Bowman said. The new proposals address the remaining two pillars, Basel III and the G-SIB surcharge, by revising the risk-based capital framework to use a single set of calculations, improving alignment between requirements and risk, and revising the G-SIB surcharge to better capture the risks to the largest and most complex banks.
Effects on banks
Regulators expect the Basel III proposal to result in a small increase in requirements for the largest banks, Bowman said. However, the G-SIB surcharge proposal would result in a modest decrease in the surcharges. “Together, these proposals would decrease the requirements by a small amount.”
“Smaller banks, which are more focused on traditional lending activities, will see slightly larger reductions in capital requirements,” she said. “These changes will maintain resilience and provide flexibility to provide credit to U.S. households and businesses.”
ABA, associations respond
Bowman’s remarks reflected “a thoughtful, bottom-up approach towards addressing the concerns reflected in the 97% of commenters who identified issues with the previous Basel proposal,” the American Bankers Association, Financial Services Forum and Bank Policy Institute said in a joint statement.
“We have consistently called for a capital framework that reflects the actual risks in the banking system, rather than over-calibrated requirements that impede economic growth and unnecessarily drive up costs,” they said. “The capital proposal outlined today suggests a welcome focus on risk-sensitivity and a comprehensive view, taking into account the cumulative effects of all capital requirements.”
Still, the associations added the “details matter” and said they plan to review the proposals in full.
