The Fed’s Michael Barr Previews Basel Reproposal
September 10, 2024
In remarks at the Brookings Institution today, Michael Barr, Federal Reserve Vice-Chair of Supervision, shared his recommendation to re-propose the Basel endgame and G-SIB surcharge rules.
The big picture: Barr recommended a number of specific changes to the framework.
- While capital charges will still increase for covered banks, the increase will not be as much as originally proposed.
- Unfortunately, specific items in CREFC’s comments were not mentioned in Barr’s speech.
This CREFC Alert focuses on Barr’s specific “broad and material” proposed changes to the Basel endgame. Taken together, the re-proposals would have a topline impact on the following banking organizations:
- GSIBs: Increase aggregate common equity tier 1 capital requirements by 9%;
- Other large, non-GSIB banks: The inclusion of unrealized gains and losses on their securities in regulatory capital, estimated to be equivalent to a 3% to 4% increase in capital requirements over the long run, would drive the overwhelming increase in capital requirements.
- Specifically, banks with $100-$250 billion in assets would no longer be subject to the endgame changes (other than recognition of securities’ unrealized gains and losses in regulatory capital).
Key changes would include, among others:
- Reducing the risk-weights for residential real estate and retail exposures;
- Eliminating the minimum haircut for securities financing transactions;
- Significantly reducing the risk weight for tax credit equity funding structures; and
- Softening of several operational risk requirements.
Market risk capital requirements will continue to drive a substantial portion of capital levels. However, the re-proposal would allow:
- A multiyear implementation period for the profit and loss attribution tests that are used to confirm that models are working as intended; and
- Uniform mortgage-backed securities positions to be treated as having a single obligor.
What they’re saying: In the Q&A session following his remarks, Barr was asked if the re-proposals were the result of intense bank lobbying or acknowledging that the banking regulators had been too aggressive in their original proposals. Barr responded that:
- This was an example of learning and relearning “lessons in humility” and that the Fed had absorbed the feedback that they “hadn’t taken enough into context unintended consequences.”
What’s next: Barr noted that the banking regulators have not made final decisions on any aspect of the re-proposals, including those not explicitly addressed in the re-proposal. Specifically:
- The Fed continues to consider comments received on the 2023 proposal and will consider those comments together with any of those submitted on the re-proposals as part of any final rulemakings.
- Barr expects that an open meeting of the Board will be scheduled soon. In a Q&A session following his remarks, Barr said that he “expects broad support from the Board.”
CREFC anticipates that the Board meeting will take place soon after next week’s FOMC meeting.
Once the text of the Basel endgame’s re-proposal is available, CREFC will review against the comments we provided in January 2024 and potentially submit an updated comment letter.
Please contact Sairah Burki at sburki@crefc.org with questions.