- Key insight: Federal regulators issued a suite of proposals that would reduce bank capital requirements for all banks.
- Supporting data: The Federal Reserve estimates that the proposals would reduce Common Equity Tier 1 capital requirements for Category I and II banks by 4.8%, for Category III and IV banks by 5.2%, and by 7.8% for smaller banks.
- Expert quote: “The result will be more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness and financial stability.” — Federal Reserve Vice Chair for Supervision Michelle Bowman
WASHINGTON — The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued a suite of proposed rules Thursday that would cumulatively reduce the amount of capital banks will have to retain by billions of dollars.
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The agencies, led by the Federal Reserve, published three separate proposals; one implementing remaining elements of the Basel III accords, which concern risk-based capital requirements for the largest banks or those with significant trading activity; another to adjust the Global Systemically Important Bank capital surcharge; and a third to modify the U.S. standard approach to calculating capital requirements.
The cumulative impact of the proposals — combined with proposed changes to the Fed’s stress testing regime — would be a 4.8% reduction in common equity tier 1 capital requirements for the largest banks, known as Category I and II banks, a 5.2% CET1 reduction for Category III and IV firms, and a 7.8% capital reduction for smaller banks.
In a statement ahead of the Federal Reserve’s board meeting, Fed Vice Chair for Supervision Michelle Bowman said the proposals, taken together, would “meaningfully improve the bank capital framework by addressing duplicative overlaps, matching requirements to actual risk, and comprehensively addressing long-standing gaps in our framework.”
“The result will be more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness and financial stability,” Bowman said. Bowman was joined by Fed Govs. Christopher Waller, Stephen Miran and Board Chair Jerome Powell in offering support for the rule.
Powell, in his statement, said that it is prudent to reexamine our regulatory frameworks at “regular intervals” and align them with international standards. He added that he supports “seeking public comment on all three of these proposals.”
Fed Gov. Michael Barr, who had previously served as Vice Chair of Supervision when the Fed issued its prior Basel III proposal, said in a statement that he does not support the regulatory package and said that, when combined with the recently implemented changes to the enhanced Supplemental Leverage Ratio, the total cumulative capital reduction for the GSIBs would be closer to 6%, or $60 billion. By contrast, a Fed official told reporters ahead of the meeting that the Fed estimates the total capital reduction to be between $20 and $21 billion across banking organizations.
“These significant reductions in capital requirements are unnecessary and unwise,” Barr said. “The capital surcharge for G-SIBs could be refined and the Basel III reforms could be adopted in the United States without materially weakening the capital framework. Today’s proposals, if adopted, would harm the resilience of banks and the U.S. financial system.”
The Fed and the FDIC are slated to vote on the proposals Thursday morning at 10 a.m.
This is a developing story. Check back for more updates.