The banking agencies’ Basel capital proposal is an improvement from the 2023 proposal, but changes that eliminate areas of overcapitalization and better align capital charges with risk are needed, the American Bankers Association and other trade associations said in a comment letter today.
ABA also joined other associations in a second letter on a related regulatory proposal to revise the risk-based capital treatment of certain assets and other exposure categories under the standardized approach, which applies to most banks.
Basel implementation
The most recent proposal to implement the Basel III endgame agreement was released in March after the 2023 proposal stalled following criticism from the banking sector and various business and consumer groups. In their letter, the associations said the new proposal takes “a big-picture view of the capital framework, seeks to simplify the framework’s design and better aligns capital requirements with risk.”
“However, some overlapping requirements remain, leading to excessive capital charges for certain risks,” they said. “Our recommended changes would further improve risk sensitivity and reduce unnecessary complexity, advancing the proposal’s stated goals. The changes will ultimately benefit bank customers and the economy while promoting a sound banking system.”
Their recommendations include:
- Mitigate the overlap between the stress capital buffer and the proposal in terms of operational risk by applying a uniform 12% business indicator coefficient.
- Revise the market risk and credit valuation adjustment frameworks to resolve the over-calibration for these risks resulting from the overlap between the stress test and the proposal.
- Retain the current definition of the terms “commitment” and “unconditionally cancelable.” The proposed “clarification” to these definitions is ambiguous, would introduce significant additional uncertainty into the capital framework, and would result in an unquantifiable and unanalyzed increase in capital requirements. This uncertainty could have a negative effect on business lending, they said.
- Reduce the risk weight for appropriately hedged mortgage servicing assets from 250% to 100%.
- Impose a required implementation date of no earlier than Jan. 1, 2028, allowing sufficient time for banks to implement the requirements, while allowing banks to adopt it earlier.
- Consider interactions and timing implications between the effective date of the proposal and the forthcoming stress test rule.
Standardized approach
The standardized approach sets capital requirements based on standardized risk weights across banks other than those mandatorily subject to the proposed Basel-based Expanded Risk-Based Approach, or smaller banks that opt into the Community Bank Leverage Ratio framework.
In their letter, the associations offered recommendations to improve the calibration and risk sensitivity of the proposed revised standardized approach.
“In general, we appreciate the detailed explanations and impact analysis provided in the proposal, which have enabled us to more effectively evaluate the proposal and provide the recommendations in this letter,” they said. “However, this letter also discusses issues arising from the proposed revisions to the definitions of ‘commitment,’ ‘unconditionally cancelable,’ ‘traditional securitization,’ and ‘synthetic securitization,’ which we strongly urge the agencies not to finalize in light of the ambiguity these proposed changes would create and the unassessed — and unassessable — effect they would have on firms’ capital requirements.
“Apart from these changes, we encourage the agencies to finalize the proposal expeditiously, so firms and the broader economy can benefit from the improved risk sensitivity in the revised standardized approach.”
