Regulators unveil sweeping changes to capital rules for banks with $100 billion or more in assets

U.S. regulators on Thursday unveiled a sweeping set of proposed changes to banks’ capital requirements to address evolving international standards and the recent regional banking crisis. The changes, designed to boost the accuracy and consistency of regulation, will revise rules tied to risky activities including lending, trading, valuing derivatives and operational risk, according to a notice from the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Long expected by banks, the proposed rules seek to tighten regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders. They incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out. The changes will broadly raise the level of capital that banks need to maintain against possible losses, depending on each firm’s risk profile, the agencies said. While the heightened requirements apply to all banks with at least $100 billion in assets, the changes are expected to impact the biggest and most complex banks the most, they said. “Improvements in risk sensitivity and consistency introduced by the proposal are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements,” the regulators said in a fact sheet. Tier 1 common capital levels measure an institution’s presumed financial strength and its buffer against recessions or trading blowups.

Long phase-in period

Most banks already have enough capital to meet the requirements, the regulators said. They would have until July 2028 to fully comply with the changes, they said. The KBW Bank Index dipped less than 1% in midday trading; the index has fallen 11% this year. Further, in response to the failure of Silicon Valley Bank in March, the proposal would force more banks to include unrealized losses and gains from certain securities in their capital ratios, as well as compliance with additional leverage and capital rules. That effectively eliminates a regulatory loophole that regional banks enjoyed; while larger firms with at least $250 billion in assets had to include unrealized losses and gains on securities in their capital ratios, regional banks won a carve-out in 2019. That helped mask deterioration in SVB’s balance sheet until investors and customers sparked a deposit exodus in March.

Higher standards

The changes would also force banks to replace internal models for lending and operational risk with standardized requirements for all banks with at least $100 billion in assets. They would also be forced to use two methods to calculate the riskiness of their activities, then adhere to the higher of the two for capital purposes. “Today’s banking system has more large and complex banks than ever to support our dynamic economy,” acting OCC head Michael Hsu said in a statement. “Our capital requirements need to be calibrated to this reality: providing strong foundations for large banks to be resilient to a wide range of stresses today and into the future.” Regulators have invited commentary on their proposal through Nov. 30; banks and their interest groups are expected to push back against some of the new rules, saying they will boost prices for customers and force more activity into the so-called shadow banking sector. Trade groups including the American Bankers Association, the Consumer Bankers Association and the Financial Services Forum issued statements questioning the rationale for the stricter capital requirements. “There is no justification for significant increases in capital at the largest U.S. banks and no other jurisdiction is likely to adopt the approach proposed today, which will only increase the significant disparity that already exists between U.S. and foreign bank capital requirements,” Kevin Fromer, CEO of the Financial Services Forum, said in an email. “Regulators and other policymakers should carefully consider the harmful economic impact of this proposal,” he added.