Largest banks could face a 19% increase in capital requirements according to proposals from the Federal Reserve, FDIC, and OCC.
The U.S. federal banking regulatory agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), have proposed new rules that would increase the amount of capital the country's eight global systemically important banks have to hold by approximately 19%.
The 1,089-page proposal, which aims to bring U.S. rules in line with Basel III, would alter the way banks calculate risk-weighted assets, requiring them to use two different methodologies to obtain the figure. This change would likely result in banks having to hold more capital, as they would have to use whichever methodology calculated a higher level of risk-weighted assets when figuring their capital ratios.
Banks with more than $100 billion in assets would have to account for unrealized gains and losses on available-for-sale securities and adhere to a stricter leverage requirement. Banks with between $250 billion and $1 trillion in assets would see about a 10% increase, while banks with $100 billion to $250 billion would see a 5% increase in capital holdings.
The proposed rules may potentially force some banks, especially the largest, to cut certain services or increase fees. Banks that rely heavily on certain types of fee income, such as from wealth management, would face heightened requirements. The proposed rules do not mention any purchase licensing rights.
Jonathan McKernan, who serves on the FDIC's board of directors, stated that capital is skin in the game, and with more capital, shareholders are more likely to bear the consequences of their bank's decisions. Michael Barr, the Fed's vice chair for supervision, previewed some of his recommendations in a speech little more than two weeks ago.
In a statement, the OCC's acting chief, Michael Hsu, compared capital requirements to building codes, stating that they are foundational and establish rules so that the public can rest assured that banks are safe and resilient to stress. Agency officials have said most banks already hold enough capital to meet the new requirements, and those that don't could catch up within two years.
Notable banks like American Express stand to see a steeper uptick in capital holdings due to their healthy share of income from swipe fees. Jeffrey Campbell, the CFO of American Express, said last week he doesn't expect Thursday's proposed rules to move the needle internally.
The proposed rules would take public comment until Nov. 30, with the aim of issuing a final rule next year and phasing it in gradually between July 2025 and June 2028. Banks may temporarily hold off on share buybacks as they adjust to the new requirements.
The proposed rules would measure the G-SIB surcharge in increments of 10 basis points rather than 50, providing a more gradual approach to the increase in capital requirements. The rules would also include a boost to the capital banks must hold against home loans, which may lead some residential mortgage lenders to tighten their standards or reduce their portfolios.
These proposed changes are part of a broader effort to strengthen the financial system and ensure that banks have enough capital to weather economic downturns and maintain stability. The public is encouraged to submit comments on the proposal before the deadline on Nov. 30.
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