On July 27, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) issued a joint notice of proposed rulemaking that would revise the capital requirements applicable to large banking organizations (those with $100 billion or more in total assets) and to banking organizations with significant trading activity to improve the calculation of risk-based capital requirements and better reflect the risks of these banking organizations’ exposures. The revisions include replacing current requirements that allow for the use of banking organizations’ internal models for credit risk and operational risk with standardized approaches and replacing the current market risk and credit valuation adjustment (CVA) risk requirements with revised approaches. The proposal would implement the final components of the Basel III agreement (discussed here).

Generally speaking, the collective impact of this proposal is to strengthen the regulatory capital requirements that apply to banks with $100 billion or more in total assets, and banks with less than $100 billion in assets if they have significant trading activity. The proposal should not impact regulatory capital requirements that apply to community banks (per the FDIC’s announcement, available here).

While the proposed rulemaking clocks in at a lengthy 1087 pages, the agencies concurrently released a 5-page overview of the proposed rulemaking and an even more concise fact sheet for ease of review.

Major elements of the proposed rulemaking include:

  • Applying the supplementary leverage ratio and countercyclical capital buffer requirements, if activated, to all large banking organizations, rather than only to banking organizations subject to Category I, II, or III capital standards (see Illustration of Capital Categories chart at end of post). Banking organizations subject to Category I standards would continue to be subject to the strictest standards.
  • Requiring banking organizations subject to Category III or IV standards to include unrealized gains and losses on available-for-sale securities in regulatory capital.
  • Replacing the models-based advanced approaches for credit and operational risks with a new set of standardized approaches. The capital measurement for banking organizations subject to Category III or IV standards would be consistent with that of banking organizations subject to Category I or II standards.
    • The operational risk capital requirements under the expanded risk-based approach would be based on a banking organization’s business volume and historical losses.
    • The current market risk framework would be replaced with a new standardized methodology for calculating risk-weighted assets for market risk and a new models-based methodology, which would require a more rigorous model approval process and include supervisory trading desk-level approval for the use of the proposed models-based approach.
    • Under the proposed expanded risk-based approach, banking organizations would calculate total risk-weighted assets using: (1) a new standardized approach for credit risk; (2) the revised approach for CVA risk; (3) a new standardized approach for operational risk; and (4) the revised approach to market risk.
  • Replacing the current approaches for measuring capital requirements for CVA risk for over-the-counter derivative contracts with non-model-based approaches, including a less burdensome option intended for less complex banking organizations.
  • Revising certain existing qualitative disclosure requirements and introducing new requirements related to the proposed revisions to the capital rule. The proposal would also remove from the disclosure tables most of the existing quantitative disclosures, which would instead be included in regulatory reporting forms. The agencies will propose revisions to the reporting forms of the Federal Financial Institutions Examination Council (FFIEC) for affected banking organizations to align forms and instructions to the proposed revisions.

The proposal includes transition provisions to allow banks sufficient time to adjust to the changes. The rule would be phased in over a three-year period beginning on July 1, 2025.

Interested parties may submit comments on the proposed rule until November 30, 2023.

Illustration of Capital Categories referenced in the proposal:

Category ICategory IICategory IIICategory IV
U.S. GSIBs (and their insured depository institution (IDI) subsidiaries)Banking organizations with ≥$700 billion in total assets or ≥$75 billion in cross-jurisdictional activity (and their IDI subsidiaries)Banking organizations with ≥$250 billion in total assets or ≥$75 billion in nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposure (and their IDI subsidiaries)Other banking organizations with $100 billion to $250 billion in total assets (and their IDI subsidiaries)