Factbox: How U.S. regulators are reforming bank capital rules

By Pete Schroeder

WASHINGTON (Reuters) – U.S. banking regulators on Thursday unveiled sweeping plans to simplify and ease numerous capital requirements for the nation’s largest banks, potentially freeing up billions of dollars for loans, dividends and share buybacks.

Top regulatory officials appointed by Republican President Donald Trump say “rules imposed after the 2008 financial crisis have become too burdensome and are stifling lending and the economy.”

The changes they are proposing to the “Basel III” and “GSIB surcharge” rules, along with adjustments to banks’ annual “stress tests”, will calibrate capital in line with real risks, while keeping the financial system safe, they say.

Critics say they will weaken financial system safeguards just as geopolitical and private credit risks are rising.

Here’s some of what was proposed Thursday and how it’s estimated to impact existing capital requirements:

Proposal capital

change for 8 global

American banks

Basel III +1.4%

GSIB surcharge -3.8%

Changes in stress tests (changes -4.3%

to the shock of the global market and

operational risk)

Changes in stress tests (other +1.9%

settings)

Total -4.8%

BASEL III

The most important piece of Thursday’s proposals is a new attempt to implement risk-based capital standards required under the international “Basel” agreement introduced after the crisis.

The U.S. proposal overhauls how big banks measure their risk and, in turn, how much capital they should reserve as protection against potential “losses.” The main areas of focus are credit risk, market risk and operational risk.

The original 2023 Basel draft, led by Bowman’s Democratic predecessor Michael Barr, proposed increasing capital by 16%. Big banks said they could increase their levels by up to 20%.

Thursday’s proposal is much softer: Fed officials estimate it would increase capital by just 1.4%, which will be more than offset by related adjustments to other capital levers.

Among the main changes: Thursday’s proposal eliminates the so-called “double-stack” approach, which would have required big banks to calculate capital under two separate methods and apply the larger of the two. Regulators on Thursday proposed applying a new single calculation method, saying it will be simpler and more consistent.

The proposal will also allow banks to rely on their own internal models to calculate market risk in some cases, as long as they have robust data and models, unlike regulatory models, which banks say can be too direct and punitive.

GSIB SURCHARGE

A second proposal would ease the “GSIB surcharge,” an additional layer of capital that applies to eight of the country’s systemically important banks, through two major changes.

First, the Federal Reserve will update the calculation data, which was set around 2015, to account for economic growth. Banks have complained that such “ratios” are outdated and that, as a result, the surcharge overstates the banks’ footprint in the economy. The Federal Reserve proposed automatically adjusting those ratios along with economic growth.

A second change would reduce the impact of banks’ reliance on short-term wholesale funding on the surcharge calculation. That factor, Federal Reserve officials say, has become more influential in the calculation than originally intended.

The Federal Reserve also proposed calculating the surcharge based on average daily or monthly financial data, as opposed to the current practice of calculating it at the end of the year.

Fed staff estimate that these and other adjustments would reduce the capital of the eight GSIB banks by 3.8%.

STANDARDIZED APPROACH

A third proposal would overhaul the “standardized approach” smaller banks use to calculate risk-based capital.

In particular, in an attempt to incentivize banks to make more mortgage loans and services, regulators have proposed no longer requiring banks to deduct mortgage servicing assets from their capital. Instead, banks could count those assets as capital, while assigning a 250% risk weight. That change applies to banks of all sizes.

However, one capital increase facing large regional banks is the requirement that they begin accounting for unrealized losses on their books. This is in response to the collapse of Silicon Valley Bank in 2023, which saw a rapid outflow of deposits after it reported large unrealized losses following rapid interest rate increases. That change will increase capital requirements for those banks by 3.1%, although their capital is expected to fall 5.2% when all pending changes are considered, the Federal Reserve said.

However, banks with less than $100 billion in assets do not have to meet that new requirement. Its capital is expected to fall 7.8% under the revised rules.

(Reporting by Pete Schroeder; Editing by Andrea Ricci)