Banks with $100 billion or higher in assets receive major capital regulation changes

The regulations governing banks with assets of $100 billion or more are undergoing significant revisions, which the regulators have just made public.

Thursday, U.S. officials announced a wide range of changes they want to make to the capital requirements for banks. These changes are in response to changing international standards and the recent regional banking crisis.

According to a notice from the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp., the changes are meant to make regulations more accurate and consistent. They will change rules about risky activities like lending, trading, valuing derivatives, and operational risk.

The new rules have been expected for a long time by banks. They aim to tighten industry regulation after its two most significant crises in recent memory: the financial crisis of 2008 and the upheaval in regional lenders in March. They use parts of Basel III, an international set of rules for banks agreed upon after the 2008 financial disaster and has taken years to implement.

The changes will, on average, raise the amount of capital banks need to keep on hand to cover possible losses. The exact amount will rely on each firm's risk profile. Even though the new rules apply to all banks with assets of at least $100 billion, they are most likely to affect the biggest and most complicated banks, they said.

In a fact sheet, regulators said, "Improvements in risk sensitivity and consistency brought about by the proposal are expected to lead to a 16% increase in common equity tier 1 capital requirements as a whole." Tier 1 common capital levels show how strong an institution is thought to be financially and how much of a cushion it has against recessions or trade disasters.

It takes a long time to get started.

The regulators said that most banks already have enough cash to meet the needs. They said they would have until July 2028 to follow the changes fully.

The KBW Bank average went down by less than 1% at midday. This year, the standard has gone down by 11%.

Also, because Silicon Valley Bank failed in March, the plan would force more banks to include unrealized losses and gains from particular securities in their capital ratios. They would also have to follow more rules about leverage and capital.

That closes a legal loophole that regional banks took advantage of. Bigger banks with at least $250 billion in assets had to include unrealized losses and gains on securities in their capital ratios, but regional banks won a carve-out in 2019; this helped hide that SVB's balance sheet was worsening until March when investors and users pulled their money out of the bank.

More stringent rules

The changes would also require banks with at least $100 billion in assets to replace their models for lending and operational risk with standards that are the same for all banks with at least that much money. They would also have to use two ways to determine their activities' risks and use the higher of the two to decide how much cash they need.

In a statement, acting OCC head Michael Hsu said, "Today's banking system has more large and complex banks than ever before to support our growing economy." "Our capital requirements need to be matched to this reality," the report said. "This means giving big banks strong foundations so they can handle a wide range of stresses now and in the future."

Regulators have asked for feedback on their plan until 30 November. Banks and their interest groups will likely fight back against some of the new rules, saying that they will raise customer prices and force more business into the so-called shadow banking sector.

Trade groups like the American Bankers Association, the Consumer Bankers Association, and the Financial Services Forum said they didn't understand why the capital standards were getting stricter.

Kevin Fromer, CEO of the Financial Services Forum, said in an email, "There is no reason 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 make the big difference between U.S. and foreign bank capital requirements even bigger."

"Regulators and other policymakers should carefully think about how bad this plan would be for the economy," he said.