WASHINGTON — The FDIC Board voted to issue a proposed rule that would impose higher capital standards on the biggest U.S. banks and with the most pronounced impacts on the largest firms. The FDIC estimated that the proposal would increase common equity tier one capital requirements by 16% for bank holding companies and 9% for other insured depository institutions.
"Strengthening capital requirements for large banking organizations better enables them to absorb losses, with reduced disruption to financial intermediation and the U.S. economy," said FDIC Chairman Martin J. Gruenberg at Thursday's board meeting. "Enhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs."
Gruenberg said the proposal aligns the calculation of regulatory capital for banking organizations with total assets between $100 billion and $700 billion with a standardized formula already applicable to the largest firms. For banks in this category, the proposed rule would replace banks' own risk models for market, credit and operational risk with standardized risk models and require firms to account for unrealized gains and losses on available-for-sale securities when calculating capital.
The proposal would institute new requirements for firms based on size and complexity. The proposal would extend the supplementary leverage ratio and countercyclical capital buffer to apply to banks with $100 billion or more in total assets. Banks with less than $100 billion in total assets may also face higher requirements if they have significant trading activity. The FDIC said this proposal will have no impact on community banks. Stricter capital standards would still apply to U.S.-based globally systemically important banks (GSIBs).
The proposal would allow for a three-year phase-in period after it goes into effect on July 1, 2025, though the FDIC said it believes most banks are
Bank regulators have been
The board was split on partisan lines in support of the new requirements. Republican Vice Chair Travis Hill said banks should be evaluated on a case-by-case basis — known as tailoring — rather than being categorized by asset size, as outlined in the proposal. He also expressed skepticism toward certain aspects of the
"I have concerns with the impact of excessive gold-plating of international standards and am skeptical of certain aspects of the underlying Basel standards," Hill said. "I oppose unwinding the tailoring of the capital framework for large banks following the 2008 financial crisis."
FDIC board member Jonathan McKernan also stood against the proposal, arguing that there wasn't sufficient rationale for the proposed changes and that they deviated from the rationale behind the existing capital framework.
"It would take a big leap of faith to support this proposal," McKernan said. "This reverse engineering of higher capital pays little heed to the associated economic costs and, if finalized, would result in a capital framework unmoored from the principles that have historically rationalized the framework."
Democratic appointees — FDIC Chair Gruenberg, Acting Comptroller of the Currency Michael Hsu and Consumer Financial Protection Bureau director Rohit Chopra — supported the higher capital requirements, saying the long-term strengthening effects of higher capital sustainably strengthen consumer access to banking, and outweigh any short-term costs banks incur.
Hsu emphasized the necessity for robust bank capital requirements, likening them to stringent building codes that ensure that buildings don't fall down.
"Just as the public expects building codes to be robust and not to 'cut things close' — especially for large structures — the bank capital requirements need to be robust and not 'penny wise, pound foolish,' especially for large banks," he said. "Strong capital requirements allow banking organizations to serve as a source of strength for the U.S. economy during times of economic stress and to continue to lend to creditworthy households and businesses through a variety of economic cycles."
Chopra said the rules will force banks to rely on their own capital buffers, which will incentivize firms to be more careful stewards and reduce moral hazard.
"Because big bank failures impose such massive pain on the economy, and banks themselves prefer to rely on other people's money to fund their operations, we are proposing a rule that requires their shareholders to have some more skin in the game," he said. "Struggling banks will limit their lending, failed banks don't lend at all. And we've never endured an economic calamity that harms our people because our largest banks were too stable."
FDIC staff estimated that five major bank holding companies may fall short of the new proposed standards, but noted that because these shortfalls represent less than one year of their average earnings over the past seven years, those banks should be more than able to meet the revised regulations while still maintaining sufficient capital adequacy.
The agencies will accept comments on the proposal through November 30, 2023.
