Banking Agencies Propose Amending Capital Requirements Consistent with Basel Standards

Sebastian Souchet Commentary by Sebastian Souchet

The Federal Reserve Board, OCC and FDIC jointly proposed amendments that would "substantially" revise capital requirements for large banking organizations to be consistent with international capital standards issued by the Basel Committee on Banking Supervision.

Among other things, the banking agencies proposed to amend the regulatory capital framework by:

  • replacing the internal model-based approach for credit and operation risk with a standardized approach to (i) account for tail risks and (ii) assess risks of less liquid trading positions;
  • implementing "consistent" capital calculation requirements that would take into account unrealized gains and losses on available-for-sale securities to assess actual loss-absorbing capacity;
  • standardizing banking organizations’ approach to public disclosures to "increase the comparability and transparency" of their capital requirements; and
  • requiring a non-model-based approach to assess credit valuation adjustment risk for OTC derivatives contracts.

The agencies stated that the proposed reforms would be implemented in accordance with the proposal’s transition provisions with a fully phased-in target date of July 1, 2028.

Comments on the proposal must be submitted by November 30, 2023.


  • FRB Chair Jerome H. Powell supported the proposal and requested comment on: (i) assessing the calibration of the proposed capital increases on areas such as capital market activities and operational risk; (ii) ensuring that the "consistency and anti-arbitrage" benefits of the proposed standardized approach outweigh the costs of treating risks of different business activities as identical; and (iii) making regulations reflective of the size and risks of individual institutions, even with recent bank failures showing the need to strengthen requirements for institutions with less assets.
  • FRB Vice Chair for Supervision Michael S. Barr said that the proposal was an "important step" toward aligning capital requirements with risks, including those related to the recently failed banks. He noted the analysis showing that additional costs to economic activity from additional capital are outweighed by the "benefits of a robust financial system." He also stated that the capital impact on the economic activities would be "modest" and that ultimately the proposal would contribute to economic growth.
  • FRB Governor Michelle W. Bowman emphasized the importance of international parity in capital standards among banks, but highlighted that the proposal "deviates significantly from international standards and perpetuates differences in implementation across internal jurisdictions." She stated that the proposal would "substantially increase" risk-based capital requirements but fails to provide sufficient evidence that the benefits justify the costs. While in favor of the proposal to revise the G-SIB surcharge to "reduce cliff effects within the current rule," Ms. Bowman requested input on whether there are "less burdensome" alternatives to measurements of certain systemic indicators.
  • FRB Governor Christopher J. Waller agreed with the proposed calculation changes to the G-SIB surcharge, but voted against the proposal, arguing that it would increase costs without "clear benefits to the resiliency of the financial system." He stated that the stress tests and real-world events have shown that the capital structure for the largest banks are already "resilient to very large macroeconomic shocks" and that the proposal would "materially increase requirements for the largest banks."


Given the proposed amendments’ breadth and complexity, in-depth analysis of the proposed amendments is necessary. That being said, a few highlights from the proposal are below:

  • Tailoring. While the proposal does not alter the specific Category I-IV tailoring thresholds established by the prudential regulators in 2019, the proposed amendments would significantly reduce the gap in requirements that apply between the regulatory categories. As alluded to in statements by Governor Bowman, Governor Waller, and FDIC Vice Chair Hill, the proposed amendments appear to materially reverse much of the tailoring of the capital framework for large banks. Under the proposed amendments, Category III and Category IV firms would be subject to various new requirements that are currently generally applicable only to U.S. GSIBs. Among other things, such new requirements for Category III and Category IV firms include application of: (i) the requirement to calculate capital under both the new “expanded risk-based approach” subject to an “output floor,” and the standardized approach; (ii) most elements of accumulated other comprehensive income ("AOCI") in regulatory capital, consistent with treatment for banking organizations subject to Category I or II capital standards; (iii) total loss absorbing capacity ("TLAC") holdings deduction treatments; (iv) the supplementary leverage ratio and countercyclical capital buffer (for Category IV firms); (v) risk-weighted assets ("RWAs") regarding operational risk, market risk (to the extent not already subject), and credit valuation adjustment ("CVA") risk; (vi) capital deductions and limitations on minority interests that currently apply to Category I or II firms; and (vii) the requirement to use the standardized approach for counterparty credit risk to calculate exposures to derivatives contracts.
  • GSIB Surcharge and Calculation of Cross-Jurisdictional Activity. The proposed amendments would revise the calculation of certain systemic indicators used in the GSIB surcharge framework and the framework for determining prudential standards for large banking organizations. In particular, the proposed amendments would revise the systemic indicators for cross-jurisdictional activity claims and cross-jurisdictional liabilities to include derivative exposures to “provide a more accurate and comprehensive measure of a banking organization’s cross-jurisdictional activity and the associated risks intended to be captured” (p. 35 of the GSIB surcharge proposal). The proposed amendments would calculate cross-jurisdictional derivative claims and cross-jurisdictional derivative liabilities gross of collateral. Notably, the GSIB surcharge proposal states that the revisions to the cross-jurisdictional activity systemic indicator would “substantially increase the reported value of cross-jurisdictional activity of the combined U.S. operations and U.S. intermediate holding companies of most foreign banking organizations that have combined U.S. assets of $100 billion or more” (p. 46). In particular, 7 foreign banking organizations that are currently within Category III or IV would fall within Category II under the proposed amendments (p. 46). The GSIB surcharge proposal also states that two U.S. intermediate holding companies of foreign banking organizations that are currently subject to Category III standards would become subject to Category II standards (p. 47). The re-classification of these firms would have significant regulatory consequences with respect to liquidity and other prudential standards, in addition to enhanced capital requirements.
  • Digital Assets. The proposed amendments do not appear to provide specific guidance on how large banking organizations might incorporate digital asset holdings into their regulatory capital calculations.

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