FRB Vice Chair for Supervision Outlines Proposals to Recalibrate Bank Capital Framework

In remarks at the Cato Institute Policy Forum, Federal Reserve Board ("FRB") Vice Chair for Supervision Michelle W. Bowman detailed plans to modernize and recalibrate U.S. bank capital requirements.

Ms. Bowman described forthcoming proposals to revise the four pillars of the regulatory capital framework: (i) stress testing, (ii) the supplementary leverage ratio, (iii) the Basel III framework for risk-based capital requirements, and (iv) the global systemically important bank ("G-SIB") surcharge. She said the FRB is working with the OCC and the FDIC to advance these joint rulemakings. Ms. Bowman described the effort as a "bottom-up ... recalibration" rather than an attempt to reach a predetermined aggregate capital target. She said each requirement is being evaluated on its own merits to ensure it is appropriately calibrated and does not push activity into the less-regulated nonbank sector.

Ms. Bowman said the upcoming Basel III proposal would "eliminat[e] duplicative capital calculations for the largest banks" by replacing parallel standardized and internal model-based ratios with a single framework, while improving risk sensitivity calibrations across credit, operational, market, and counterparty credit valuation adjustment risk. She noted that the proposed changes will address "critical categories of bank lending, including mortgages, consumer lending, and business lending," and that such changes "moderately reduce requirements and align the standardized approach with the Basel III proposal" to "ensure[] greater consistency and a level playing field among all banks." Notably, the simplified standardized approach will "remove any requirement to deduct mortgage servicing assets from regulatory capital," and instead "assign[s] a 250 percent risk weight to these assets while seeking public feedback about the appropriate risk weight." Ms. Bowman said that such changes should "reduce disincentives for participating in mortgage markets and servicing their mortgage originations, thereby addressing the mortgage activity migration to nonbanks over the past 15 years." The standardized approach proposal will, over a five-year phase-in period, require large banks to "include elements of accumulated other comprehensive income...in common equity tier 1 capital," to "align[] with the treatment of these assets for the largest institutions."

Ms. Bowman also identified the G-SIB surcharge as a particular concern, arguing that it has "become disassociated from actual risk." She explained that the upcoming proposal would recalibrate the surcharge by indexing it to economic growth, adjusting the "short-term wholesale funding component," and aligning the U.S. methodology more closely with international standards. Furthermore, the proposal will require G-SIBs to "calculate certain systemic risk indicators as an average of their daily or monthly values, rather than the year-end value" in order to reduce incentives to make year-end adjustments to balance sheets.

Ms. Bowman explained that the combined effect of the proposals—together with earlier changes to stress testing and the supplementary leverage ratio—would maintain capital requirements above their 2019 baselines. She emphasized that the goal is not to weaken the regulatory framework. Instead, the objective is to ensure capital requirements "appropriately capture risk rather than being overly punitive," while preserving banks’ ability to supply credit to households and businesses.