Banking regulators today advanced three proposed rules to lower capital requirements for banks of all sizes as part of an effort to boost lending activity.
The first proposed rule would implement the Basel III endgame agreement by revising the risk-based capital requirements for the largest banks. The second proposal would revise how the surcharge for globally systemically important banks, or GSIBs, is calculated. The third proposal would revise the risk-based capital treatment of certain assets and other exposure categories under the standardized approach, which applies to most banks.
According to a board memo by Federal Reserve staff, the proposals would lower aggregate common equity tier 1 capital requirements for category I and II banks by 4.8%, for category III and IV banks by 5.2%, and for smaller banks by 7.8%. (Banks that have elected or later elect the Community Bank Leverage Ratio would not be affected; changes proposed in 2025 to that standard are still pending.)
Capital reforms
The Fed board voted 6-1 to put the proposed rules out for public comment, with Governor Michael Barr the sole dissenter. The three-member FDIC board voted unanimously to advance the proposals.
According to the Fed
- The Basel III proposed rule would create standardized risk-weighting methodologies for credit, equity and operational risks for the largest banks. It also would simplify the framework by subjecting large institutions to only a single set of risk-based capital calculations. Smaller banks would have the option of electing this approach.
- The proposed GISB rule would revise the surcharge calculation in several ways. Among the changes, the proposal would modify the calculation to better reflect changes in the financial system and economy over the past few years, and it would assign surcharges in increments of 10 basis points rather than 50 basis points.
- The proposed standardized approach seeks to better align capital requirements with the risk of traditional lending activities. For example, the proposal would use loan-to-value ratios to determine the applicable risk weight for residential real estate exposures.
Right-sizing regulation
Vice Chair for Supervision Michelle Bowman, who led the Fed’s effort, said regulators implemented several reforms to increase bank capital following the financial crisis. While the initial reforms were necessary, “experience shows that overly calibrated requirements on low-risk activities produce unintended consequences.”
“Many of these requirements have constrained credit availability, pushed activity into the less-regulated non-bank sector, and added complexity and costs without meaningfully enhancing safety and soundness,” she said.
Barr, who led an unsuccessful Basel implementation during the Biden administration, called the proposals “unnecessary and unwise.”
“The capital surcharge for G-SIBs could be refined and the Basel III reforms could be adopted in the United States without materially weakening the capital framework,” he said. “Today’s proposals, if adopted, would harm the resilience of banks and the U.S. financial system.”
Banking groups respond
In a joint statement, the American Bankers Association and four other bank associations called the proposals “an important step forward” in modernizing the bank capital framework.
“We welcome regulators’ efforts to enable banks of all sizes to make more loans to American businesses and households, fueling economic growth while maintaining resilience in the banking system,” they said. “We will carefully review the proposal and expect to provide feedback after assessing the impact on our members and the millions of customers they serve.
“We continue to appreciate regulators’ willingness to hear perspectives from all stakeholders, and their commitment to thoughtfully consider the cumulative effect of all capital requirements,” they added.
