On July 27, 2023, in an effort to bolster the resilience of the U.S. banking system in the aftermath of recent bank failures and to promote consistency with international banking capital standards, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (together, the “Agencies”) issued a notice of proposed rulemaking which would standardize the way large banks calculate risk-weighted assets and minimum capital requirements (the “NPRM”). While the NPRM primarily applies to those banks with $100 billion or more in total consolidated assets (“Large Banks”), banks with total assets below the $100 billion threshold may still be affected if they have either (a) trading assets and trading liabilities at or above $5 billion or (b) trading assets and trading liabilities greater than or equal to ten percent (10%) of their total assets.
At a high level, the revised framework proposed by the NPRM would require Large Banks to include unrealized gains and losses on available-for-sale securities in minimum capital calculations and utilize new standardized credit risk and operation risk methodologies as well as revised market risk and credit valuation adjustment risk approaches when calculating total risk-weighted assets. The revised framework would also expand the scope of both the minimum three percent (3%) supplementary leverage ratio requirement and the countercyclical capital buffer requirement, which currently pertain to only those banks with $250 billion or more in total consolidated assets, to apply to all Large Banks. Furthermore, the revised framework would apply more stringent capital deductions and minority interest treatments to Large Banks in an effort to ensure regulatory capital ratios better reflect capacity to absorb losses. In addition, banks with total assets below the $100 billion threshold but that have either (a) trading assets and trading liabilities at or above $5 billion or (b) trading assets and trading liabilities greater than or equal to ten percent (10%) of their total assets will be required to comply with the new market risk approach applicable to Large Banks under the proposed rule.
The Agencies believe that the implementation of the revised framework described above would result in an aggregate sixteen percent (16%) increase in common equity tier 1 capital requirements for those Large Banks that would be affected. And, while the Agencies believe that the majority of Large Banks currently have enough capital to satisfy the revised framework’s proposed requirements, the NPRM highlights that the proposed changes would be phased in over the course of a three (3) year transition period following the final rule officially taking effect (which is not expected prior to July of 2025).
The public may submit comments on the NPRM through November 30, 2023. The full text of the NPRM, which includes a discussion of the proposed changes to the Capital Rule, the timetable for implementing the proposed changes, an impact and economic analysis as well as instructions on how to submit comments to the Agencies, can be found here. Additionally, a condensed overview of the NPRM can be found here.