Federal Reserve Vice Chairman for Supervision Michael Barr today outlined a series of sweeping changes that he will recommend to the proposed Basel III endgame capital requirements, including reproposing the rule to kick off a new round of public review and comment. Among other things, banks with assets between $100 billion and $250 billion would no longer be subject to the proposed changes, other than the requirement to recognize unrealized gains and losses of their securities in regulatory capital, according to Barr.
Speaking at the Brookings Institution in Washington, D.C., Barr said the new proposal would increase aggregate common equity tier 1 capital requirements for the global systemically important banks by roughly 9%, or half of what would have been required in the original proposal. For large non-GSIB banks, the reproposal would mainly result from the inclusion of unrealized gain and losses on their securities in regulatory capital, estimated to be equivalent to a 3% to 4% increase in capital requirements over the long run, he said. The remainder of the reproposal would increase capital requirements for non-GSIB firms still subject to the rule by roughly 0.5%.
Barr also plans to recommend changes to the proposed capital surcharge for GSIBs, including dropping proposed changes to capital requirements associated with client clearing. He also said the reproposal would include data gathered from banks on the expected impact of the original proposal, on which the public could comment.
‘Lesson in humility’
In a Q&A after his presentation, Barr described last year’s introduction of the original Basel III proposal as “a lesson in humility.” He acknowledged that last year’s failures of Silicon Valley Bank and two other large banks shaped regulators’ approach to the issue.
“When we were thinking about the various tradeoffs and the calibration of how conservative to be, we were quite conservative,” he said. “But a lot of commenters said, ‘Yeah, you were very conservative, but you didn’t take into account enough potential unintended consequences. You didn’t take into account enough the tradeoffs involved in capital.’ We heard those comments, and I think the proposal that we’re putting forward soon is really responsive to that concern.”
The Fed board must take a vote on the reproposal before it moves forward. Barr said he expected the board to hold a meeting on the revised rules in the near future, and that there is broad support among his colleagues for the reproposal. Barr also plans a 60-day public comment period for the reproposal.
ABA: ‘Do-over’ absolutely necessary
The American Bankers Association welcomes Barr’s announcement that the regulatory agencies are reproposing the Basel capital rules, ABA President and CEO Rob Nichols said. In light of the bipartisan criticism of the proposal and the overwhelming opposition from commenters, including many from outside of banking, “a do-over was absolutely necessary,” he added.
“We will carefully review this new proposal with our members, recognizing that America’s banks are already well-capitalized and, as Vice Chair Barr acknowledged today, any increase in capital requirements will still carry a cost for the economy and must be appropriately tailored,” Nichols said.
“In this reproposal, we strongly urge regulators to show their work and demonstrate that they have carefully analyzed the impact of any proposed capital increases, something missing from the original proposal,” he said. “We also call on the agencies to allow for a sufficient comment period for a thorough evaluation of the revised rule.”
