On July 27, 2023, US federal banking regulators put forth proposals to revise the risk-based regulatory capital requirements for certain midsize and larger US banking organizations, as well as to change the method for calculating the capital surcharge for globally systemically important banking organizations (G-SIBs). These proposals are crucial as the amount of capital a bank must maintain plays a significant role in determining the profitability and feasibility of their operations.
The Capital Proposal would apply to banking organizations with $100 billion or more in assets, as well as those with significant trading activity. It would significantly increase the capital requirements for most institutions, including the 8 US G-SIBs, approximately 22 larger and mid-sized US banking organizations, and several other entities. However, it would not directly affect credit unions or the non-US operations of foreign banking organizations.
The Capital Proposal entails changes to the calculation of risk-based capital requirements and an expansion of the range of risks for which capital must be held. It also imposes more stringent requirements compared to the international standards set by the Basel Committee on Banking Supervision. Common equity Tier 1 (CET1) capital for banking organizations subject to the Capital Proposal is expected to increase by around 16%.
Key provisions of the Capital Proposal include the adoption of a more stringent standardized approach for credit risk, a dual-stack requirement for calculating risk-based capital ratios, increased market risk capital requirements, a standardized framework for operational risk capital, the elimination of the opt-out for accumulated other comprehensive income (AOCI), and an output floor limiting deviations from the expanded standardized approach.
The release of the Capital Proposal was met with significant dissents from officials at the FDIC and the Federal Reserve, raising the possibility of material changes to the proposal before finalization. Congress has also requested that banking regulators testify about the potential adverse impacts of the proposal on the economy, financial markets, and lending.
If adopted in its current form, the Capital Proposal could require banking organizations to increase their capital levels through various means and could lead to higher costs for bank lending and trading activities. Smaller banking organizations may face pressure to merge or expand in order to spread the costs over a larger asset base. Additionally, the proposal may affect the competitiveness of US banks globally and impact banking organizations with significant fee income operations.
Given the significant divisions among banking regulators and the public interest in the proposal, it is expected that the Capital Proposal will not be finalized until 2024 at the earliest.
