Treliant Takeaway…Proposed Rules to Strengthen Capital Requirements for Large Banks

Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule

• Source: fdic.gov

Takeaway:

Treliant’s Credit Solutions practice comprises former senior financial services risk executives and regulators who combine their extensive experience, qualifications, and know-how to assist financial institutions as they prepare to meet these regulatory expectations. We provide financial institutions consulting support on credit risk management and governance, capital stress testing, the Basel Accord, climate scenario analysis, loan portfolio workouts, and advice on portfolio risk-mitigation strategies.

Bank senior management and the board need to ensure that they are responsive to the increased capital requirements by enhancing independent risk management, providing effective challenge and oversight, and demonstrating that appropriate controls are in place to meet the coming supervisory expectations.

Highlights:

U.S. bank regulators unveiled a sweeping overhaul today that would direct banks to set aside billions more in capital to guard against risk, which was immediately slammed by the industry as “misguided.” Bank regulators argued that such costs would be more than offset by the benefit of a more resilient U.S. banking system. The industry is already warning that such a big hike could force them to trim services, raise fees, or both.

The proposal, approved by the Federal Deposit Insurance Corporation, will be voted on at a later date by the Federal Reserve. The proposal marks an extensive effort to tighten bank oversight that saw three large financial U.S. banks fail earlier this year. The proposal would also implement the final components of the Basel III agreement, also known as Basel III endgame. Regulators will accept comments on this proposal through November 30th.

Capital is the buffer banks have to hold to absorb future losses. The large banks affected by the changes will see an aggregate 16% increase in their capital requirements from current levels. Regulators say the increase would primarily affect the largest and most complex banks and that most have enough capital already to comply.

Banks affected will be those with more than $100 billion in total consolidated assets. For banks below $100 billion in total assets, the market risk provisions of the proposal would also apply to those with significant trading activity. Capital requirements would not change for community banks. The proposal includes transition provisions to allow banks sufficient time to adjust to the changes while minimizing any potential adverse impact. Under the proposal, the rule would be fully phased in on July 1, 2028.