Fed's Barr proposes a change in Basel regulations, aiming at increasing capital requirements by 9%
In a significant move to reshape the banking sector, the Federal Reserve's Vice Chair for Supervision, Michael Barr, announced changes to the proposed Basel endgame regulations on Tuesday. The latest revisions aim to address structural overlap in capital requirements, restore alignment with global standards, and avoid raising aggregate capital levels beyond international norms.
The Basel III endgame proposals, if approved, would result in substantial changes for global systemically important banks (G-SIBs) and large regional banks. The revisions primarily focus on modifications in how risk-weighted assets are calculated. For G-SIBs, market risk capital requirements under the Fundamental Review of the Trading Book could increase by over 63%, while Credit Valuation Adjustment risk capital could rise by about 7.7%. This means larger banks face higher capital costs that could influence decisions on business expansion, dividend policies, and capital allocation strategies.
Despite these increases, recent supervisory stress tests anticipate that US G-SIBs' stress capital buffers will decline by 88 basis points on average, enabling dividend increases by roughly 12%. This adjustment somewhat offsets the increased capital needs from Basel III revisions.
Vice Chair Barr's approach seeks to ensure that the final Basel endgame rules do not excessively raise capital requirements beyond international standards, minimizing undue burdens on banks while maintaining or enhancing financial stability. Banks with between $100 billion and $250 billion in assets would face a 0.5% increase in their capital requirements under the revised proposal. Large banks with $250 billion or more in assets would need to hold 3% to 4% more capital.
The Fed is also considering how stress tests complement the proposed rules. It's important to note that these changes are part of ongoing work to finalize Basel III reforms and reflect input from regulators, industry, and international bodies.
Jamie Dimon, CEO of JPMorgan Chase, previously criticized the initial Basel endgame proposal, calling the tougher capital requirements "flawed and poorly calibrated." Fed Chair Jerome Powell also expressed expectations for "broad" and "material" changes to the proposal. Michael Barr, in his statement, emphasized the importance of getting the regulations right and mentioned that bank capital is a key component of the banking industry's resiliency. He also stated that the journey to improve capital requirements since the 2008 financial crisis is important and that the Basel III endgame re-proposals bring them closer to completing the task.
Barr also made it clear that the plans aren't set in stone and that regulators are open to comments on any aspect of the re-proposals. Banks will have a year to begin implementation once the rule is finalized. The revised proposal, if approved, would cut roughly in half the amount of extra capital large banks would have been forced to hold compared to the initial proposal.
In summary:
| Aspect | Details | |------------------------------------|------------------------------------------------------------------------------------------------| | Key focus | Resolve capital stack overlap; align with global standards; avoid raising aggregate capital levels beyond global norms[1] | | Capital requirement increase | ~21% increase for G-SIBs; ~10% increase for large regional banks[2] | | Market risk capital impact | +63% under Fundamental Review of Trading Book for some banks[2] | | Credit valuation adjustment (CVA) | +7.7% CVA risk capital requirements[2] | | Stress capital buffers (SCB) | SCB expected to decline by 88 basis points on average for US G-SIBs, enabling dividend increases[4] | | Regulatory goal | Achieve international consistency, minimize complexity and duplication, improve financial stability[1][4] |
[1] Federal Reserve Press Release, 2023 [2] Basel Committee on Banking Supervision, 2023 [3] Office of the Comptroller of the Currency, 2023 [4] Federal Deposit Insurance Corporation, 2023
In light of the Basel III endgame re-proposals, large banks may have to adjust their capital allocation strategies and investing decisions due to increased capital costs. The revisions aim to ensure that these capital requirements are balanced, minimizing undue burdens on banks while maintaining financial stability, thereby impacting the overall business landscape of the banking sector.
With stricter capital requirements in place, the focus for G-SIBs and large regional banks could shift towards finance strategies that optimize their capital usage, potentially leading to changes in business expansion, dividend policies, and investments.
