Major banks in the US are currently up in arms about proposed amendments that would significantly raise capital requirements for banking organisations with USD100 billion or more in assets. Known as the Basel III endgame, the proposal is based on the final iteration of the Basel III international capital standards set by the Basel Committee on Banking Supervision. Bank failures, such as the fall of Silicon Valley bank in March this year, are the main motivations behind the change.
The amendments were jointly proposed by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC). The proposal states that the framework would, for the most part, “eliminate the use of banking organisations’ internal models to set regulatory capital requirements and in their place apply a simpler and more consistent standardised framework”.
The debate
A critical piece published on Thomson Reuters calls the proposal “draconian”, pointing out that it would raise capital for the country’s largest banks by about 16 percent, or USD200 billion, above even levels mandated by Basel III rules. Dissidents question whether the proposal will target the real issue at hand, claiming that recent bank failures have been caused by poor risk management and supervision, not a lack of capital.
Regulators argue that historical experience has shown individual banking organisations to have the potential of causing huge impact on the stability of the US banking system. An increased capital requirement would allow banks to “absorb losses with reduced disruption to financial intermediation in the US economy” and that they expect the benefits of strengthening capital requirements to outweigh the costs. Submission of comments on the proposal will close on 30 November 2023.