Regulators in the U.S. disclosed a broad set of proposed revisions for capital stipulations of banks on Thursday. The modifications target all banking institutions with assets of at least $100 billion and are expected to affect the larger and more intricate banks most of all, they said. The reforms aim to take into account the regional banking crisis and current international regulations.
On Thursday, U.S. regulators presented a wide range of suggested alterations to banks' capital standards to align with evolving international standards and address the recent bank crisis. The modifications, aimed to enhance accuracy and uniformity of regulation, will modify rules connected to hazardous operations like lending, trading, valuing derivatives and operational risk, according to a statement from the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.The proposed rules, which were anticipated by banks, represent an effort to strengthen regulation of the industry in the wake of its two biggest disasters in recent times - the 2008 financial crisis and the March disturbance in regional lenders. These regulations encompass aspects of the worldwide banking regulations known as Basel III, which was accepted subsequent to the 2008 crisis and has taken many years to implement.The standards will generally amplify the amount of capital that banks must retain against possible losses, depending on each institution's risk profile, the agencies declared. While the stringent requirements are obligatory for all banks with no less than $100 billion in assets, the alterations are expected to have a greater impact on the biggest and most complex banks, they said."The improvements in risk sensitivity and consistency introduced by the proposal are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements," the regulators stated in a fact sheet. Tier 1 common capital levels assess an organization's likely financial strength and its cushion against recessions or trading blowups.
Regulators indicated that many banks already have enough capital to satisfy the requirements. Moreover, they have until July 2028 to fully comply with the changes. The KBW Bank Index had a marginal rise of less than 1% during midday trading, despite it dropping 11% so far this year. Aimed at addressing the failure of Silicon Valley Bank in March, the ruling forces banks to include unrealized losses and gains from certain securities in their capital ratios, as well as abide by new leverage and capital rules. Doing away with a 2019 concession provided to regional banks, which enabled them to leave unrealized losses and gains from securities off their capital ratios, the measure intends to prevent a recurrence of the circumstances where SVB's deteriorating balance sheet went unnoticed until investors and depositors sparked a deposit exodus in March.
The proposed changes would necessitate that banks with $100 billion or more in assets swap out their internal models for lending and operational risk for standardized guidelines. They would also be obligated to implement two methods to judge the riskiness of their operations, then observe the stricter of the two when determining capital requirements.
Acting OCC head Michael Hsu released a statement, saying, “The modern-day banking framework consists of an unprecedented volume of large and complicated banks that provide for our ever-shifting economy. Therefore, our capital regulations must be in line with this shift and build strong foundations for big banks to be able to defend themselves against a range of external forces now and in the future.”
The regulatory authorities have asked for comments on the proposal until the end of November. It is expected that banks and related groups will oppose certain aspects of the plan, claiming that it will raise customer costs and push more activity into the unregulated shadow banking sector.
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