Agencies Request Comment on Proposed Rules to Strengthen Capital Requirements for Large Banks (2024)

For release at July 27, 2023

Bank regulatory agencies today requested comment on a proposal to increase the strength and resilience of the banking system. The proposal would modify large bank capital requirements to better reflect underlying risks and increase the consistency of how banks measure their risks.

The changes would implement the final components of the Basel III agreement, also known as the Basel III endgame. Additionally, following the banking turmoil in March 2023, the proposal seeks to further strengthen the banking system by applying a broader set of capital requirements to more large banks. The proposal would generally apply to banks with $100 billion or more in total assets. Community banks would not be impacted by this proposal.

In particular, the proposal would standardize aspects of the capital framework related to credit risk, market risk, operational risk, and financial derivative risk. Additionally, the proposal would require banks to include unrealized gains and losses from certain securities in their capital ratios. These banks would also be subject to the supplementary leverage ratio and the countercyclical capital buffer, if activated.

The proposed improvements 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, with the increase principally affecting the largest and most complex banks. The effects would vary for each bank based on its activities and risk profile. Most banks currently would have enough capital to meet the proposed requirements.

The proposal includes transition provisions to give banks sufficient time to adapt to the changes while minimizing any potential adverse impact. During the comment period, the agencies will collect data to further refine their estimate of the proposal’s impact. Under the proposal, large banks would begin transitioning to the new framework on July 1, 2025, with full compliance starting July 1, 2028.

Separately, the Federal Reserve Board today also requested comment on a proposal that would make certain adjustments to the calculation of the capital surcharge for the largest and most complex banks. The changes would better align the surcharge to each bank’s systemic risk profile, in particular by measuring a bank’s systemic importance averaged over the entire year, instead of only at the year–end value.

Comments on both proposals are due by November 30, 2023, which is more than 120 days for public comment.

PR-55-2023

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Last Updated: July 27, 2023

Agencies Request Comment on Proposed Rules to Strengthen Capital Requirements for Large Banks (2024)

FAQs

Which agencies request comment on proposed rules to strengthen capital requirements for large banks? ›

Bank regulatory agencies today requested comment on a proposal to increase the strength and resilience of the banking system. The proposal would modify large bank capital requirements to better reflect underlying risks and increase the consistency of how banks measure their risks.

How can banks increase capital requirements? ›

US regulators proposed new rules last summer requiring banks to add billions of dollars to their so-called capital cushions, which offer protection during downturns. The heaviest burdens would fall on the biggest banks, which would have to boost their capital levels by about 19%.

Why would regulators place capital requirements on banks? ›

A primary purpose of bank capital is to protect depositors from losses and banks from failure. Ensuring adequate capital has been a consistent historical priority of US banking regulators as part of their role in promoting a safe banking system.

How does the US proposes to implement Basel III capital Rules and the impact on US bank capital ratios? ›

In July 2023, U.S. regulators issued the Basel III Endgame Proposal (the “Proposal”) “that would substantially revise the capital requirements applicable to large banking organizations and to banking organizations with significant trading activity.” The Proposal involves a substantial increase in capital requirements ...

What are the capital requirements for banks? ›

What Are Capital Requirements? Capital requirements are standardized regulations for banks and other depository institutions that determine how much liquid capital (that is, easily sold securities) must be held viv-a-vis a certain level of their assets.

Which of the following norms intends to strengthen bank capital requirements? ›

To strengthen the international banking system, Basel norms put an effort to coordinate banking regulations across the globe. The objective of Basel Norms III is to increase the liquidity of banks and decrease bank leverage.

What are the three ways to increase capital? ›

Four common ways to raise capital for a company are through personal contacts, private equity or vc firms, crowdfunding, or a business loan.

What is the proposed capital regulation? ›

Under the proposed capital rule, some lending activities are expected to become more costly for larger banks, notably certain mortgage lending, among others. In addition, various non-interest fee-based operations are slated to become more costly for larger banks.

What are the risk based capital requirements for banks? ›

Risk-based capital requirements are minimum capital requirements for banks set by regulators. There is a permanent floor for these requirements—8% for total risk-based capital (tier 2) and 4% for tier 1 risk-based capital. Tier 1 capital includes common stock, reserves, retained earnings, and certain preferred stock.

Why do regulators prefer higher capital requirements? ›

Capital requirements are among regulators' most powerful tools in managing risky bank behaviors and reducing the likelihood of bank failures and taxpayer bailouts. These requirements determine how much of a bank's loans and investments must be funded by money from its owners, as opposed to debt.

Why are big banks resisting bigger capital cushions? ›

Banks generally want to hold as little capital as necessary; holding more capital means less capital invested, reducing returns to stockholders.

What regulators regulate banks? ›

Banking Regulators
  • Board of Governors of the Federal Reserve System. Federal Reserve Consumer Help. ...
  • Federal Deposit Insurance Corporation. Federal Deposit Insurance Corporation. ...
  • Office of the Comptroller of the Currency. Comptroller of the Currency. ...
  • National Credit Union Administration. ...
  • Consumer Financial Protection Bureau.

Do US banks follow Basel III? ›

This is often referred to as “gold-plating” the standards. US banking organizations experienced similar, comparatively more rigorous standards than peers in other jurisdictions in 2013 when the United States adopted the Basel III standards.

How do you know if your bank is Basel III compliant? ›

Banks are required to hold a leverage ratio in excess of 3%, and the non-risk-based leverage ratio is calculated by dividing Tier 1 capital by the average total consolidated assets of a bank.

How will Basel III affect banks? ›

Impact of Basel III

Most banks will try to maintain a higher capital reserve to cushion themselves from financial distress, even as they lower the number of loans issued to borrowers. They will be required to hold more capital against assets, which will reduce the size of their balance sheets.

What federal agency helps regulate banks? ›

The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury.

Who sets bank capital requirements? ›

Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are modeled off international agreements made by the members of the Basel Committee on Banking Supervision, which ...

Which regulatory agencies provide oversight for the banking industry? ›

There are numerous agencies assigned to regulate and oversee financial institutions and financial markets in the United States, including the Federal Reserve Board (FRB), the Federal Deposit Insurance Corp. (FDIC), and the Securities and Exchange Commission (SEC).

What two agencies regulate banks? ›

State-Chartered Banks
  • Federal Deposit Insurance Corporation (FDIC) - The FDIC insures state-chartered banks that are not members of the Federal Reserve System. ...
  • Federal Reserve Board - The Federal Reserve Board supervises state-chartered banks that are members of the Federal Reserve System.

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