FEDERAL GOVERNMENT RELATIONS
Banking Regulators Propose New Capital Requirements
On Thursday the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency proposed new capital requirements for banks with more than $100 billion in assets. The proposal would implement the so-called "Basel III endgame" standards while eliminating the practice of relying on banks’ internal risk models. If implemented, the new rules would go into effect over three years starting on July 1, 2025. Public comments on the proposal are due Nov. 30.
The proposed rulemaking would raise capital by an average of 16%, according to estimates offered by the Fed Chairman for Supervision Michael Barr. It seeks to establish a more consistent set of capital requirements across larger banks following the economic turmoil caused by the failures of Silicon Valley Bank and Signature Bank in March. Banks with more than $100 billion would be required to include unrealized gains and losses from certain securities that are “available for sale” in their capital ratios; to comply with the supplementary leverage ratio requirement; and to comply with the countercyclical capital buffer, if activated. (For banks below $100 billion in total assets, the market risk provisions of the proposal would also apply to those with $5 billion or more in trading assets plus trading liabilities, or for which trading assets plus trading liabilities represent 10% or more of total assets.)
The Fed also voted in favor of a separate but related proposal concerning changes to the calculation for the surcharge for global systemically important banks, which must maintain additional capital buffers. Among other provisions, the proposal would make changes in the measurement of some systemic indicators to improve how the surcharge reflects risk, according to Fed staff.
View a fact sheet on the proposed capital requirements
Read an interagency overview of the rulemaking
Proposed Capital Requirements Divide Fed, FDIC Boards
The decision by federal agencies to move forward with new capital requirements for large banks wasn’t unanimous, with dissenters on both the Fed and Federal Deposit Insurance Corp. boards saying regulators were pushing for a one-size-fits-all approach that has been previously rejected by Congress. The FDIC board voted 3-2 in favor of the proposal while the Fed board voted 4-2 in favor.
FDIC Vice Chairman Travis Hill and Board Member Jonathan McKernan voted against the new standards. Hill said the rules effectively lumped several categories of banks into a single regulatory scheme, which runs counter to congressional intent as expressed in a 2018 law that directed banking agencies to tailor regulation to institution size. “It is further a troubling sign for future policymaking, a signal that regulators intend to treat all large banks alike, in defiance of congressional directives and in contradiction to the objective of a diverse banking sector with banks of varying sizes, niches and business models,” Hill said. McKernan questioned the lack of rationale behind the Basel Committee's standards and the singular focus on raising capital levels without assessing the potential costs.
Fed Governors Michelle Bowman and Christopher Waller also cast dissenting votes. Like Hill, Bowman expressed concerns about the lack of tailoring in the proposal, but she also questioned the focus on capital in regulators’ response to the SVB and Signature Bank failures. Even Fed Chairman Jerome Powell, who voted to approve the proposal, expressed caution. “U.S. and global regulators raised large bank capital requirements significantly in the wake of the global financial crisis,” he said. “While there could be benefits of still higher capital, as always we must also consider the potential costs.”
“While there's more to learn about the recent bank failures, it seems apparent that these failures are caused primarily by poor risk management and deficiency, not by a lack of capital,” Bowman said. “I'm concerned that today's proposed rule and other yet-to-be-proposed regulatory changes will add to the challenges facing the U.S. banking system and impose real costs on banks, their customers and the economy without commensurate benefits to safety and soundness or to financial stability.”
House Republicans Unveil ESG Bills Aimed at Regulators
Republicans on the House Financial Services Committee Tuesday unveiled four bills aimed at curbing what they characterized as “ESG excesses” among regulators, including legislation that would eliminate the position of vice chair of supervision at the Federal Reserve. The four bills combine several Republican bills on ESG, with three focused on the Securities and Exchange Commission. The fourth bill would increase congressional oversight of banking regulators.
“America’s banking regulators are implementing regulations on climate change in the form of environmental, social and governance policies, but the American people and Congress are being left in the dark as to how these policies are being formulated,” said Rep. Barry Loudermilk, R-Ga., sponsor of the banking regulator bill.
FDIC Says Banks Need to Correctly Report Uninsured Deposits
The Federal Deposit Insurance Corp. Monday issued a letter to remind financial institutions of their obligation to report estimated uninsured deposits in accordance with the instructions to the Call Report. The notice does not apply to institutions with less than $1 billion in total assets that do not report estimated uninsured deposits, the agency said.
If an institution has deposit accounts with balances in excess of the federal deposit insurance limit that it has collateralized by pledging assets – such as deposits of the U.S. government and of states and political subdivisions in the U.S. – then it should make a reasonable estimate of the portion of these deposits that is uninsured using the data available from its information systems, the FDIC said.
Some institutions incorrectly reduced the amount reported to the extent that the uninsured deposits are collateralized by pledged assets, the FDIC said. “This is incorrect because in and of itself, the existence of collateral has no bearing on the portion of a deposit that is covered by federal deposit insurance.” The agency also said some institutions incorrectly reduced the amount reported on Schedule RC-O by excluding intercompany deposit balances of subsidiaries.
Sens. Brown, Vance Seek to Exclude Certain Deposits from Special Assessment
Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and Sen. J.D. Vance, R-Ohio, said last week in a joint letter to the Federal Deposit Insurance Corp. that the agency should focus on the types of uninsured deposits that were at the greatest run risk during the recent bank failures in its special assessment. The proposed assessment, which would recover the costs of protecting uninsured deposits at Silicon Valley Bank and Signature Bank, would exempt the first $5 billion in uninsured deposits. However, the Ohio senators said that while the assessment would not apply to most community banks, “it does impact some Main Street-focused regional banks.”
Brown and Vance said the FDIC should consider excluding collateralized and affiliate deposits when calculating an institution’s amount of uninsured deposits. They also said the agency should consider using post-failure deposit data from March 31, 2023, to better reflect the migration of deposits to the largest banks.
Indiana Joins State Associations’ Letter Seeking Equal Treatment for Stablecoin Issuers, Banks
A House bill that would regulate stablecoins is flawed because it doesn’t apply the same level of federal oversight to state-licensed stablecoin issuers as is currently applied to state-chartered banks, 50 state bankers associations said in a letter Friday to the House Committee on Financial Services. The draft legislation by House Financial Services Committee Chairman Patrick McHenry, R-N.C., would allow state banking regulators to approve and supervise stablecoin issuers. In the joint letter, the associations said such a model is inefficient to provide the strong regulatory oversight needed for effective consumer protection and financial stability.
“While some have advocated for this role for state regulators by comparing it to the dual-banking system, the proposed state path for payment stablecoin issuers is not comparable to that of state-chartered banks,” the groups said. “Rather, the proposed oversight model is more like state-based money transmitter licenses, a model that is insufficient to mitigate the risks to financial stability and consumer protection posed by stablecoins.”
Federal oversight applied in an equivalent manner as that for state-chartered banks “would include state-licensed stablecoin issuers having a primary federal regulator that evaluates and approves or rejects license applications, establishes and enforces compliance with rules to ensure financial stability and consumer protection, and participates in ongoing supervision,” the associations said.