Federal bank regulatory agencies requested public comment on Mar. 19 regarding three proposals aimed at modernizing the regulatory capital framework for banks of all sizes. The proposed changes are intended to streamline capital requirements, better align them with risk, and maintain the safety and soundness of the banking system.
The proposals matter because they address lessons learned since the global financial crisis, during which regulators increased both the quantity and quality of required loss-absorbing capital and introduced stress testing for large banks. According to the agencies, experience over the past decade has shown that certain elements of the current framework could be improved without reducing safety and soundness.
The first proposal would primarily affect the largest, most internationally active banks by enhancing risk sensitivity, reducing burden, improving consistency across institutions, and implementing final components of the Basel III agreement. These banks would use a single set of calculations for compliance with risk-based capital requirements instead of two. The proposal also aims to improve how credit, market, and operational risks are captured. Banks with significant trading activity would be subject to new market risk rules under this framework.
The second proposal targets all but the largest banks and seeks to better align capital requirements for traditional lending activities with actual risk while keeping regulations simple. It includes modifications that reduce disincentives for mortgage lending by changing how servicing and originating mortgages are treated in capital calculations. Certain large banks would also need to reflect unrealized gains and losses on some securities in their regulatory capital levels after a transition period.
A third proposal from the Federal Reserve Board focuses on improving how systemic risk is measured when determining additional capital requirements for the largest and most complex banks.
The agencies anticipate that overall capital in the banking system would modestly decrease as a result of these proposals but remain substantially higher than pre-financial crisis levels. In aggregate, large banks would see modest reductions in required capital while smaller banks could see moderate reductions due to their focus on traditional lending activities. The Federal Reserve is also releasing aggregated data used in developing these proposals. Comments must be submitted by June 18.
