Michael Barr (L), Vice Chair for Supervision on the Federal Reserve and Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC), testify about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
Saul Loeb | Afp | Getty Images
U.S. regulators on Thursday unveiled a sweeping set of proposed changes to banks’ capital requirements to handle evolving international standards and the recent regional banking crisis.
The changes, designed to spice up the accuracy and consistency of regulation, will revise rules tied to dangerous activities including lending, trading, valuing derivatives and operational risk, based on a notice from the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
Long expected by banks, the proposed rules seek to tighten regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders. They incorporate parts of international banking regulations often known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
The changes will broadly raise the extent of capital that banks need to keep up against possible losses, depending on each firm’s risk profile, the agencies said. While the heightened requirements apply to all banks with at the least $100 billion in assets, the changes are expected to affect the most important and most complex banks essentially the most, they said.
“Improvements in risk sensitivity and consistency introduced by the proposal are estimated to lead to an aggregate 16% increase in common equity tier 1 capital requirements,” the regulators said in a fact sheet. Tier 1 common capital levels measure an establishment’s presumed financial strength and its buffer against recessions or trading blowups.
Long phase-in period
Most banks have already got enough capital to fulfill the necessities, the regulators said. They’d have until July 2028 to totally comply with the changes, they said.
The KBW Bank Index dipped lower than 1% in midday trading; the index has fallen 11% this yr.
That effectively eliminates a regulatory loophole that regional banks enjoyed; while larger firms with at the least $250 billion in assets had to incorporate unrealized losses and gains on securities of their capital ratios, regional banks won a carve-out in 2019. That helped mask deterioration in SVB’s balance sheet until investors and customers sparked a deposit exodus in March.
Higher standards
The changes would also force banks to switch internal models for lending and operational risk with standardized requirements for all banks with at the least $100 billion in assets. They’d even be forced to make use of two methods to calculate the riskiness of their activities, then adhere to the upper of the 2 for capital purposes.
“Today’s banking system has more large and sophisticated banks than ever to support our dynamic economy,” acting OCC head Michael Hsu said in a press release. “Our capital requirements must be calibrated to this reality: providing strong foundations for giant banks to be resilient to a big selection of stresses today and into the long run.”
Regulators have invited commentary on their proposal through Nov. 30; banks and their interest groups are expected to beat back against a few of the latest rules, saying they are going to boost prices for patrons and force more activity into the so-called shadow banking sector.
