U.S. regulators unveil bank capital reform proposal

U.S. banking regulators are proposing reforms to boost the capital requirements for large banks and adopt the final elements of the Basel III capital rules — an effort that’s sparking criticism from the U.S. securities industry.

In a joint release, the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency set out their proposal to implement the global reforms and measures to address the banking sector turmoil this spring when several large banks failed.

“The proposal would modify large bank capital requirements to better reflect underlying risks and increase the consistency of how banks measure their risks,” the regulators said in the release.

The proposals would only impact banks with over US$100 billion in assets.

The reforms would “standardize aspects of the capital framework related to credit risk, market risk, operational risk, and financial derivative risk,” and require banks to include “unrealized gains and losses from certain securities in their capital ratios,” they said.

The proposals are projected to produce an aggregate 16% increase in common equity tier 1 capital requirements for large banks, with the largest and most complex banks taking the biggest hit.

The regulators said that while the capital impacts will vary based on individual banks’ activities and risk profile, most banks currently have enough capital to meet the tougher requirements.

In a statement, the U.S. Securities Industry and Financial Markets Association (SIFMA) voiced a series of concerns with the regulators’ proposals.

“As currently considered, the U.S. Basel III ‘Endgame’ will overhaul the current risk-based capital framework and dramatically increase capital for the largest U.S. and internationally headquartered banks’ trading activities,” said Kenneth Bentsen Jr, CEO of SIFMA, in a release.

“Additionally, the proposed operational risk capital charge will penalize firms’ fee-based wealth management and investment banking activities.”

SIFMA argued that the proposal fails to consider how the capital rules interact with other elements of the prudential regulatory framework, and that regulators haven’t justified the need for change.

“Imposing dramatic increases in capital on the trading book will likely result in increased costs and/or reduced capital and credit to end users of our markets. The regulators have failed to provide justification for such action,” Bentsen Jr said. “Further, we fail to see the justification for imposing a capital tax on firms’ fee income businesses.”

The proposal is out for comment until Nov. 30. It’s expected that large banks will begin transitioning to the new framework on July 1, 2025, with full compliance by July 1, 2028.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.