WASHINGTON — The Federal Reserve Board on Thursday supported a proposed interagency rulemaking to impose additional capital requirements on large banks, but not without serious misgivings from a few members.
Govs. Michelle Bowman and Christopher Waller
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"I will evaluate any future proposed final rules on their merits. My views on any proposed final Basel III endgame requirements for U.S. banking organizations will be informed by the potential impact on banking sector resiliency, financial stability and the broader economy stemming from the implementation," Jefferson said during an open meeting about the proposal. "I look forward to reading and digesting the comments we received from the public, which will inform my future decision on any eventual proposed final approvals."
Jefferson has been nominated by President Joe Biden to serve as the Fed's vice chair. His nomination is due to go before the full Senate for a vote sometime this year.
Fed staffers said capital changes would have some impact on banking activity but argued that they would be offset by the increased resilience of the banking sector and fewer losses during periods of stress.
"For lending activities, the staff estimated the impact of the proposals on requirements would be modest," Marco Migueis, a staffer in the Fed's supervision and regulation division, said during the meeting. "Effects on lending as firms adjust to the new requirements are likely to be offset by the economic benefits of increased resilience."
Migueis noted that the new market risk requirements would likely lead to significant changes by some banks, but the ultimate impact will depend on how engaged those firms are in activities deemed to be high risk.
One risk area that elicited questions from the board was a change in the capital treatment of residential mortgages. The proposal calls for banks to hold more capital against mortgages with higher loan-to-value ratios, a shift that Cook worried could hurt low income borrowers who are less able to purchase homes with large down payments.
Fed staffers noted that it was not their intent to limit mortgage availability to low- and moderate-income individuals and that they would be paying close attention to comments around that particular topic.
Powell, who was broadly supportive of the proposal, also noted several topics he would like to see addressed in commentary from the public. These include the calibration of risk weights for market and operational risks, the interplay between the proposed framework and the regulatory regimes of other large economies, and how well the rules "reflect the size and risks of individual institutions."
"That approach is essential if we are to allow banks of different sizes to thrive, and preserve our diverse banking system," Powell said.
Bowman, who has
Similarly, Waller questioned whether the rule changes as outlined would be in violation of the tailoring requirements set out by the Dodd-Frank Act of 2010 and subsequent legislation.
Bowman and Waller, both of whom were appointed to the board by former President Donald Trump, also expressed concern about the compounding effects the proposed rule changes would have on existing capital requirements.
"It is not clear to me why our large banks should face a further roughly 70% hike in market risk capital requirements, on top of the existing post-crisis requirements to address risks in the trading book, including market risk capital requirements plus the stress test," Waller said. "And I worry that doing so could discourage those banks from engaging in certain market-making activities, which could impede market functioning."
The proposed rules would apply new risk-capital requirements to all banks with at least $100 billion of assets. As part of this proposed framework, banks would no longer be able to rely on internal models to determine capital requirements for credit, market and operating risks. Instead, they would have to adhere to uniform requirements.
Cecily Boggs, a staffer in the Fed's supervision and regulation division, noted that the changes would ensure that identical exposures receive the same capital treatment across banks.
Fed projections anticipate a 16% increase in aggregate capital across the affected banks, with the largest, global systemically important banks bearing the brunt of that increase — capital levels across that segment are expected to increase by 19%. For banks with $250 billion of assets or more that fall short of the G-SIB designation, capital would increase by 10%, according to the Fed, while equity requirements for banks between $100 billion and $250 billion of assets would go up 5%.
The proposal calls for the rule changes to become effective in July 2025 with a three-year phase-in period to give banks time to adjust. Barr said most banks that would be impacted by the changes already have sufficient capital to meet the new obligations, and those that do not should be able to do so
In a separate vote, the board unanimously approved a notice of proposed rulemaking on a change to the G-SIB capital surcharge. The proposal calls for a more gradual increase in the additional obligation imposed on the country's largest banks. The change is an attempt to avoid the "cliff effect" of additional capital requirements changing drastically once a bank hits certain thresholds.
The public will have 120 days to submit comments on the proposed rules.
