“Endgame” Has Arrived: US Regulators Propose New Rules for Large Banks
US regulators have proposed significant new capital standards for lenders, known as the Basel III “endgame”, which are projected to boost capital requirements for Global Systemically Important Banks (GSIBs) by 19% and have an impact on trading and lending activity.
The regulations will apply to lenders with $100 billion in assets or more, as well as other organizations with “significant trading activity,” as authorities continue their quest to reduce systemic risk and improve resilience in the aftermath of the 2008 financial crisis.
Banks will have until the beginning of 2028 to comply with the laws, with a three-year transition period starting on July 1, 2025. The proposal’s comment period will end on November 30, 2023.
Following the 2008 financial crisis, Basel III standards were agreed upon, with capital, leverage, and liquidity requirements phased out over the following years; however, the most recent reforms aim to stop the reliance on internal risk models and introduce uniform frameworks.
The market anticipated the changes, but they were also questioned by numerous experts and organizations, with many saying that the current model had allowed banks to weather Covid-19, market volatility, and annual stress testing.
The Fed’s board of governors met on Thursday to discuss the proposals, with chair Jay Powell stating his support for the changes but admitting that a “balance” needed to be struck between safeguarding the banking system and the costs associated with demanding higher capital requirements.
In response to the new proposal, Bob Broeksmit, CMB, President and CEO of the Mortgage Bankers Association, said, “Without significant revisions, this proposal will increase borrowing costs and reduce credit availability for the very consumers and borrowers this administration ostensibly seeks to assist.”
The rules were proposed by the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.