CRS Analyzes Proposed Rule on Large Bank Capital Requirements
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") prepared a detailed summary and analysis for legislators on the banking regulators' proposed "Regulatory Capital Rule: Amendments Applicable to Large Banking Organizations and to Banking Organizations with Significant Trading Activity." (See Banking Agencies Propose Amending Capital Requirements Consistent with Basel Standards).
In its report, CRS summarized the proposal to (i) "implement[] the so-called Basel III Endgame (the regulators’ final phase of regulations intended to implement policy consistent with the latest recommendations of the Basel Committee on Banking Supervision)," (ii) implement "some of the recommendations that Fed Vice Chair Michael Barr proposed in his 'holistic capital review' " and (iii) respond "to issues that arose in the 2023 large bank failures." CRS examined the goals of the proposal "to improve the consistency of capital requirements across banks, better match capital requirements to risk, reduce their complexity, and improve transparency of banks' financial condition for supervisors and the public." CRS assessed numerous provisions in the proposal as to scope and timing, changes to risk measurement (including credit risk, equity risk, operational risk and market risk), changes to the securitization framework, changes to the stress capital buffer, changes to disclosure requirements, and changes to definitions (including to the definition of capital.)
CRS reviewed criticisms of the proposal and the policy debates and trade-offs in changing those requirements. These include policy debates over (i) "gold plating" (the argument that the U.S. proposal exceeds the requirements under the "Basel III Endgame" framework); (ii) using a "standard rules vs internal models" regulatory approach; (iii) overlapping regulatory approaches; (iv) capital neutrality; (v) the tailoring of the rules (based, e.g. on size); and (vi) transparency.
Commentary
The CRS report provides a very good overview of the proposed bank capital requirements generally, and of the policy debates and trade-offs in changing those requirements. However, it does not provide enough level of detail on the proposed requirements for anyone (let alone legislators) to form a view as to whether the proposed requirements would be useful or justified or would impair economic growth.
Further, CRS reports that opponents to the proposed changes to the capital requirements argue that:
"the proposed rule repeatedly relies on data and analyses that the agencies have not made available to the public. This reliance on non-public information violates clear requirements under the Administrative Procedure Act, that agencies must publicly disclose the data and analyses on which their rulemaking is based."
CRS follows up on that point saying that the information that the bank regulators have not released "would arguably be too technical to be useful or comprehensible to the general public, although it could be useful to industry and researchers." That point may be intended to provide some support for the regulators' declining to release the requested information. In reality, no one could reasonably believe that members of the general public have any ability to assess bank capital requirements. But it is very difficult to see the basis for the regulators declining to release the information to the industry, which is presumably as capable as the government of assessing the information.