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The Office of the Comptroller of the Currency (OCC), U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) have jointly requested comment on a proposal to increase the strength and resilience of the U.S. banking system. The proposal set forth would modify large bank capital requirements to better reflect underlying risks, and increase the consistency of how banks measure their risks.
The changes would implement the final components of the Basel III agreement, also known as the Basel III endgame. Additionally, following the banking turmoil in March 2023, the proposal seeks to further strengthen the banking system by applying a broader set of capital requirements to more large banks. The proposal would generally apply to banks with $100 billion or more in total assets. Community banks would not be impacted by this proposal.
The joint agency proposal aims to improve the strength and resilience of the banking system by modifying large bank capital requirements to:
- Better reflect underlying risks; and
- Increase the transparency and consistency of the regulatory capital framework.
These goals would be accomplished by revising the capital framework for banks with total assets of $100 billion or more in four main areas:
- Credit risk, which arises from the risk that an obligor fails to perform on an obligation;
- Market risk, which results from changes in the value of trading positions;
- Operational risk, which is the risk of losses resulting from inadequate or failed internal processes, people, and systems, or from external events; and
- Credit valuation adjustment risk, which results from the risk of losses on certain derivative contracts.
Trade groups, including the Mortgage Bankers Association (MBA), expressed their opposition to the measure.
“Without significant revisions, this proposal will increase borrowing costs and reduce credit availability for the very consumers and borrowers this administration ostensibly seeks to assist,” said Robert D. Broeksmit, CMB, President and CEO of the MBA. “The large increases in capital standards will likely stunt macroeconomic growth and reduce banks’ participation as single-family and commercial/multifamily lenders, servicers, and providers of warehouse lines and mortgage servicing rights financing.”
The proposal includes transition provisions to give banks sufficient time to adapt to the changes while minimizing any potential adverse impact. During the comment period, the agencies will collect data to further refine their estimate of the proposal’s impact. Under the proposal, large banks would begin transitioning to the new framework on July 1, 2025, with full compliance starting July 1, 2028.
In an interview with Fox Business, Bank of America CEO Brian Moynihan said the process needs to assure "the playing field is level," saying the rules should be implemented carefully "so to not make the U.S. less competitive."
Moynihan added, "We're not talking about the big eight banks. ... We're talking about a $30 or $40 billion bank, or a $100 billion bank, not being able to compete for a middle market loan because a bank or a supplier in Europe ... is getting a lower cost of capital.”
In terms of the proposed rule’s impact on the nation’s already hamstrung housing market, Broeksmit said, “Given ongoing affordable housing challenges, regulators should be taking steps that encourage banks to better support real estate finance markets. These proposed changes do precisely the opposite during a time of near record-low single-family delinquencies and pristine underwriting. This proposal also undermines several current policy objectives, from closing the racial homeownership gap to promoting competition over consolidation.”
Click here for more on the Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule.
