Federal Regulators Seek Public Comment on Proposed Rules to Strengthen Capital Requirements for Large Banks

In a joint effort to enhance the strength and resilience of the banking system, federal bank regulatory agencies have issued a request for public comment on a proposed rule that aims to bolster capital requirements for large banks. The proposal seeks to modify capital requirements for these institutions, taking into account underlying risks and fostering consistency in risk measurement practices.

The proposed changes are based on the final components of the Basel III agreement, commonly referred to as the Basel III endgame. Moreover, the proposal responds to the banking turmoil experienced in March 2023, aiming to fortify the banking system by applying a broader set of capital requirements to more large banks. The proposed rule primarily targets banks with $100 billion or more in total assets, while community banks would not be affected.

Key aspects of the proposal focus on standardizing elements of the capital framework relating to credit risk, market risk, operational risk, and financial derivative risk. Additionally, the proposal would mandate banks to include unrealized gains and losses from certain securities in their capital ratios. Subjected banks would also be held to the supplementary leverage ratio and the countercyclical capital buffer, should it be activated.

The anticipated improvements, designed to strengthen the banking system, are estimated to result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected bank holding companies. The impact would primarily affect the largest and most complex banks, with varying effects based on each bank's specific activities and risk profile. Currently, most banks are projected to have sufficient capital to meet the proposed requirements.

To ensure a smooth transition, the proposal incorporates transition provisions, allowing banks ample time to adapt to the changes while minimizing any potential adverse effects. During the comment period, the regulatory agencies will gather data to further refine their estimate of the proposal's impact. If implemented, large banks would commence the transition to the new framework on July 1, 2025, with full compliance commencing on July 1, 2028.

Concurrently, the Federal Reserve Board has also requested public comment on a separate proposal aimed at adjusting the calculation of the capital surcharge for the largest and most complex banks. The objective is to align the surcharge more accurately with each bank's systemic risk profile, particularly by assessing a bank's systemic importance over the entire year, as opposed to just the year-end value.

Interested parties and stakeholders have been invited to provide comments on both proposals by November 30, 2023, granting more than 120 days for public input. As the regulatory landscape evolves, public feedback will be integral to shaping these rules and ensuring the robustness and stability of the banking system. The agencies' commitment to soliciting comments and refining the proposals highlights their dedication to transparency and responsiveness to industry concerns.