A speech was given by Michelle Bowman, Board of Governors, at a conference highlighting the impact that the capital requirements reform will have on banking.
The federal banking agencies have proposed significant reforms to capital requirements for banks with over $100 billion in assets, potentially impacting the U.S. banking market and economy, according to an article published by the Federal Reserve. The proposal could increase total risk-weighted assets across bank holding companies subject to the rule by an estimated 20%. However, concerns have been raised with the quantitative and analytical foundations of the proposal, as it does not address identified regulatory deficiencies and shortcomings. The current capital framework remains strong with more liquidity and new supervisory tools. This level of capital is a strength that complements liquidity regulations and prudential requirements contributing to the resilience of U.S. banks.
Policymakers need to assess the cost of reform including potential harm to U.S. bank competitiveness in global economy. It's important to consider combined impact on institutions subject to revised regulatory framework. International coordination can help establish capital standards globally which promotes minimum standards across jurisdictions improving competitive equity in banking markets and making financial system safer. The capital proposal reflects elements of Basel standards but exceeds its mandate driven by policy choices increasing capital requirements for U.S. banks over $100 billion, even those not internationally active.
The agencies extended comment period for proposed changes recognizing complexity and length said Federal Reserve's article. Several areas need addressing including redundancy in Capital Framework, calibration of Market Risk Capital Rule, inefficiency of two standardized capital stacks, punitive treatment of fee income and missed opportunity reviewing leverage ratio requirements.
Redundancy is concerning as many existing enhanced capital standards were considered while prudential regulation framework was under development.
Revised market risk rule could increase risk-weighted assets from $430 billion to $760 billion for Category I and II firms; from $130 billion to $220 billion for Category III and IV firms. This could impact business and municipal financing, risk management, hedging of foreign exchange and interest rate risks and managing risks of fluctuating commodity prices through hedging activities.
Inefficiency of two standardized capital stacks is an issue with firms subject to new risk-based capital rule remaining subject to standardized approach applicable to all firms, leading to a "dual-stack" capital calculation that could result in costs outweighing the benefits.
