Written by Pete Schroeder
WASHINGTON, March 19 (Reuters) – U.S. banking regulators on Thursday unveiled sweeping plans to roll back and ease capital requirements for many of the nation’s biggest banks, which could free up billions of dollars for loans, dividends and share buybacks.
Top regulatory officials appointed by Republican President Donald Trump say regulations imposed in the wake of the 2008 financial crisis have grown too onerous and are stifling lending and the economy.
The changes they are proposing to the “Basel III” and “GSIB surcharge” rules, as well as tweaks to banks’ annual “stress test” health checks, will balance capital in line with real risks, while still keeping the financial system safe, they say.
Critics say they will weaken the protection of the financial system as sovereign and private debt risks grow.
Here are some of Thursday’s proposals and how they are estimated to affect cash flows:
Capital proposal
change in 8 global
US banks
Basel III +1.4%
GSIB Fee -3.8%
Stress test changes (changes -4.3%
to global market shocks and
operational risk)
Stress test changes (another +1.9%
tweaks)
Total -4.8%
BASEL III
A major part of Thursday’s proposals is a new effort to implement risk-based capital standards required under the international “Basel” accord introduced after the crisis.
The US proposal fixes how central banks measure their risk, and how much money they have to set aside as a way to deal with potential losses. Areas of focus are credit risk, market risk and operational risk.
The original 2023 Basel framework led by Bowman’s Democratic predecessor Michael Barr proposed a 16% rate hike. Major banks have said they could raise their rates by 20%.
Thursday’s proposal is more favorable, as Fed officials estimate it would raise funds by just 1.4%, which would be more than offset by related changes in other loan payments.
Among the biggest changes: Thursday’s proposal scraps the so-called “dual stack” approach, which would have required central banks to count money using two separate methods and use the higher of the two. Regulators on Thursday proposed implementing a new accounting system, saying it would be simpler and more consistent.
The proposal would also allow banks to rely on their internal models to calculate market risk in some cases, as long as they have strong data quality and models, as opposed to regulatory models, which banks argue are meaningless and punishing.
GSIB SURCHARGE
The second proposal would ease the “GSIB surcharge,” an additional portion of fees charged by eight major global banks, with two major changes.
First, the Fed will revise its accounting figures, which were adjusted around 2015, to account for economic growth. Banks complain that those “coefficients” are out of date and therefore the surcharge exceeds the banks’ footprint in the economy. The Fed proposed to automatically adjust those coefficients around economic growth.
The second change will reduce the impact of banks’ reliance on short-term wholesale financing in the calculation of the surcharge. That factor, Fed officials say, has had more of an impact on the calculation than originally intended.
The Fed also proposed calculating the surcharge based on daily or monthly financial data, as opposed to the current year-end calculation practice.
Fed staff estimated that these and other changes would reduce the capital of the eight GSIB banks by 3.8%.
THE COMMON WAY
A third proposal would modify the “standard” approach small banks use to calculate risk-based capital.
Most notably, in an effort to encourage banks to do more with mortgage lending and servicing, regulators proposed no longer requiring banks to draw mortgage servicing assets on their capital. Instead, banks can count those assets as capital, while assigning a risk weight of 250%. That change applies to banks of all sizes.
One capital increase facing the region’s biggest banks is the need for them to start accounting for unrealized losses on their books. That is in response to the 2023 collapse of the Silicon Valley bank, which experienced a rapid outflow of deposits after it reported large unrealized losses following a rapid interest rate hike. That change will increase the capital requirements of those banks by 3.1%, although their capital is expected to decrease by 5.2% when considering all pending changes, the Fed said.
However, banks with assets under $100 billion do not have to comply with the new requirement. Their capital is expected to decrease by 7.8% below the revised rates.
(Reporting by Pete Schroeder; Editing by Andrea Ricci)
