On September 10, the Fed released the prepared remarks given by the Vice Chair for Supervision, Michael Barr, on changes to the Basel III endgame proposal and the capital surcharge for global systemically important banks (G-SIBs). The proposed changes aim to ensure banks hold enough capital to balance risk while maintaining the financial system’s safety and soundness and contributing to a “well-functioning economy that works for everyone.”
Barr stated that the revised Basel III endgame proposal will no longer apply to banks with assets between $100 billion and $250 billion, except for the requirement to recognize unrealized gains and losses of their securities in regulatory capital. This change reflects stakeholder feedback and aims to better reflect risks. Proposed revisions to the G-SIB surcharge are intended to address issues such as “window dressing” and “cliff effects.” In the aggregate, the re-proposals will increase common equity tier 1 capital requirements for the largest and most complex G-SIBs by 9 percent, while other large banks will see a 3 to 4 percent increase in capital requirements. Barr will recommend that the Fed not adopt the proposed changes to capital requirements associated with client clearing to avoid disincentives.
For credit risk, Barr will recommend that the Fed lower the proposed risk-weighting for loans secured by residential real estate and loans to retail customers. The proposed changes also include extending the reduced risk weight for low-risk corporate exposures that are investment grade but not publicly traded. Additionally, Barr will recommend that the Fed not adopt the capital treatment associated with minimum haircut floors for securities financing transactions, allowing time for greater international consensus on this topic. In terms of operational risk, Barr will recommend that the Fed no longer adjust a firm’s operational risk charge based on its operational loss history. The proposed changes also include reducing operational risk capital requirements for investment management activities. Barr noted that the Fed will accept “public comments on any aspect of the Basel endgame and G-SIB surcharge proposals.”
