FDIC approves proposed capital requirements for U.S. banks

By Steve Gelsi

The 1,100-page proposal will have a comment period lasting until Nov. 30

The Federal Deposit Insurance Corp. voted 3 to 2 on Thursday to recommend increased capital requirements and other changes for banks as U.S. regulators react to the regional-bank crisis from earlier this year and implement the international Basel III banking rules created in the wake of the Global Financial Crisis in 2008.

Banks pushed back against the rule changes and complained that they will raise the cost of lending to consumers and businesses.

As expected, the 1,100-page proposal from the FDIC includes new capital requirements for banks with $100 billion or more in assets, lowering the bar from $250 billion previously. The Office of the Comptroller of the Currency and the U.S. Federal Reserve backed the changes.

The proposal would also require banking organizations with $100 billion to $250 billion in assets to include unrealized gains and losses on available-for-sale securities in regulatory capital.

"By strengthening the requirements that apply to all large banking organizations, the proposal would enhance their resilience and reduce risks to U.S. financial stability," according to an overview of the changes by the FDIC.

The revised expanded total risk-weighted assets would be phased in by 2028 over a three-year period beginning July 1, 2025.

The FDIC, the Office of the Comptroller of the Currency and the U.S. Federal Reserve will accept comments on the proposal until Nov. 30.

Ian Katz of Capital Alpha Partners said the top-line numbers in the capital requirements came in close to expectations, and perhaps a bit lower, "though they are still very significant increases."

Katz said he expects banks to object strongly to language on capital requirements for residential mortgages that are higher than international standards.

"We think we'll see more changes before the final rule is released compared to most Fed proposals," Katz said. "This is a particularly complex and long proposal, so even leaving aside the intense political and industry pressure the regulators will face, it's logical that there will be meaningful alterations to the proposal. This game is justgetting started."

George Williams, who is a counsel at King & Spalding, said U.S. regulators are playing catch-up with many European regulators on implementing the Basel III banking accords that followed the Global Financial Crisis of 2008.

"This really amps up the detail in certain areas to make standardized data that regulators hope will be useful to them...on the kinds of complicated transactions and risks banks now engage in," Williams said. "The larger banks are also being deprived of the use of their internal models for risk-based capital requirement purposes, potentially leading to gaps between risk-based-capital and economic-risk modeling."

Regional banks in particular will be subject to higher costs and the "strain" of compliance, which may lead some to turn to third-party technology providers or new staff to implement the capital requirements and disclosures in the 1,100 pages of proposed regulations.

While the regulations may ultimately help prevent some systemic risks, "there are always new ways institutions may fail, so there's no system that will prevent that," Williams said.

John Vivian, senior director at Patomak Global Partners, said the Basel III endgame rules were delayed the COVID-19 pandemic and were also influenced the failures of Silicon Valley Bank, Signature Bank and First Republic Bank this year.

"The biggest pushback on the rules will likely come from regional banks," Vivian said. "They are being pulled into complex standards that most haven't been a part of previously. Also, larger banks may also push back over eliminating credit risk and operational models they have worked diligently to tailor to their specific activities. They may voice concern over the proposal forcing minimum capital levels higher, which then influences loan pricing for their customers."

The proposal will rely less on internal modeling by banks to calculate their credit risks and operational risks and instead require more standardized risk calculation methods.

"I'm concerned that they may be trying to use new rules instead of relying on what regulators should do through the bank exam process," Vivian said.

Financial Services Forum Chief Executive Kevin Fromer said the proposal would increase the cost and reduce the availability of capital for housing, small businesses and mid-market lending, as well as products used by American businesses to manage risks.

"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," Fromer said.

Dennis Kelleher, chief executive of Better Markets, said bank claims about the rules restricting capital flow are essentially false.

"Maximizing Wall Street's bonuses depends on minimizing capital and that's why Wall Street fights to prevent regulators from requiring them to have enough capital," Kelleher said in a prepared statement. "Of course, Wall Street's banks can't admit that, so they hide behind a smokescreen of false, baseless, and dangerous arguments against capital that do not withstand scrutiny."

Bank stocks moved into negative territory on Thursday, with the SPDR S&P Regional Banking ETF (KRE) down 1%, and the Financial Select Sector SPDR Fund (XLF) off by 0.8%.

Also Read:Fed's Michael Barr proposes new capital requirements for banks with $100 billion or more in assets

-Steve Gelsi

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07-27-23 1818ET

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