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House Democrats urge agencies to finalize Basel III Endgame rule
On February 16, the Ranking Member for the House Committee on Financial Services, Maxine Waters (D-CA), and 41 other House Democrats sent a letter to the FDIC, Fed, and OCC regarding the Basel III Endgame and the proposed rule which would impose higher capital requirements. The letter urged the agencies to finalize the rule, highlighting the purpose of capital requirements “to shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use…” The letter commended the agencies for providing the public with almost six months to comment and argued the endgame rule’s impact on access to credit is low. The letter also noted that the expected funding impact on a large bank’s average lending portfolio is expected to increase by just 0.03 percent, which it describes as “insignificant” compared to Fed interest rate increases. The letter specifically urged the heads of the agencies to finalize the rules this year “to ensure we have a banking system that will promote stable economic growth.”
House Committee calls for new quantitative analysis from Basel III “Endgame” original proposal
On January 31, the House Financial Services Committee issued a press release after holding its hearing on “Federal Banking Proposals Under the Biden Administration,” which invited two leaders from trade organizations, a lawyer, and a business school professor. The Committee’s main takeaway was that the Notice of Proposed Rulemaking from July 2023, as released by the OCC, Federal Reserve, and FDIC, provides “little quantitative analysis” of the potential economic impacts (covered by InfoBytes, here). This Notice initially opened the comment period for the Basel III “Endgame” meant to revise the capital requirements for large banking organizations.
The Committee took the position, through bipartisan agreement, that the Biden Administration “must withdraw” its Basel III “Endgame” implementing proposal and replace it with one that offers a sound and objective economic analysis that is not skewed by politics but supported by data. The Committee supports its position that the Notice provides a “paltry” economic and regulatory analysis by noting that it devotes only 17 out of 1087 pages to the analysis. The press release cited comments from various congressional members, some of whom raised concerns about the proposal’s potential impact on homebuyers and mortgage lending, and the proposal’s potential to disincentivize financing for renewable energy projects. Finally, the Committee linked several members’ comment letters over the past few months.
Fed’s Barr speaks at fireside chat, underscores the importance of public comment
On January 9, Fed Vice Chair of Supervision Michael S. Barr delivered remarks at an event held by Women in Housing and Finance, during which he discussed consumer credit, bank supervision, DEI issues, capital issues, bank regulation and more. Barr began by addressing current risks that the Fed is focused on mitigating, which included efforts surrounding the Community Reinvestment Act final rule and the Basel III Endgame proposal. The Fed, he said, has been receiving many comments on the proposal, which will help ensure the “balance” is right on the final capital rule. There is one more week before the comment period closes, he added.
Barr also discussed the second quantitative impact study the Fed is conducting to ensure accuracy and help shape the final version of the Basel III proposal. He noted that the Fed conducted the first study a “few years ago” to inform the first proposal. He mentioned that the Fed is collecting information and will be publishing their aggregated analysis for public comment. Barr also discussed comments considering whether the Fed should adjust for historical losses based on particular firms, or if there should be standardized accountability for all risk.
In response to questions from the moderator, Barr opined that the capital rules in the Basel III proposal would have a modest impact on the affordability and accessibility of mortgage credit and consumer credit. He conceded that the proposal’s impact would create higher costs, but that the impacts on consumers would be “very very small.” Barr also invited commenters to inform the Fed about the impacts. On international competition, Barr also noted that the higher capital standards would not detrimentally impact the U.S. banking system.
When asked about the Fed’s Bank Term Funding Program, made available by the Fed, FDIC, and Treasury last spring, Barr said banks and credit unions are still leveraging the program today. He explained that the “program was really designed in that emergency situation … to make sure that banks[,] and creditors of banks[,] and depositors [in] banks understand that banks have the liquidity they need.”
OCC issues cease-and-desist order to NY bank
On December 14, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals that are or were affiliated with such entities. Included is a cease-and-desist order against an upstate New York bank for allegedly engaging in unsafe or unsound practices, including on the bank’s corporate governance, capital planning, interest rate risk management, liquidity risk management, and reports of condition.
Under the order, the bank must appoint a compliance committee to take corrective action, submit a three-year strategic plan to establish objectives for the bank’s risk profile, earnings performance, growth, and balance sheet mix, among other areas, and maintain a capital ratio of at least 15 percent, a common equity tier 1 capital of at least equal to 14 percent, and a leverage ratio of at least ten percent. The order also requires the bank to create an interest rate risk program and a third-party risk management program.
Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III
On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).
Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.
Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”
Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.
Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”
Request for GAO examination of agencies’ role in Basel III endgame proposal
The Chairman of the Financial Services Committee, Patrick McHenry (R-NC), and Representative Andy Barr (R-KY), Chairman of the Subcommittee on Financial Institutions and Monetary Policy, sent a letter to the U.S. Government Accountability Office (GAO) requesting the GAO to “examine the role U.S. federal banking agencies played in work at the Basel Committee on Banking Supervision to develop the recent Basel III Endgame proposal, which calls for massive increases in capital requirements for already well-capitalized U.S. financial institutions.”
As previously covered by InfoBytes, the federal banking agencies issued a notice of proposed rulemaking that would substantially revise the capital requirements of large U.S. banking organizations. According to the letter, Congress has very little insight into the basis of such policy changes that “would fundamentally change the policy of the U.S. banking system.”
The letter requests the GAO to evaluate each federal banking agency’s participation in the development of Basel III Endgame. GAO’s evaluation should include: (i) a summary of each material proposal submitted by a federal banking agency to the Basel Committee; and (ii) a summary of concerns raised by a federal banking agency with respect to a consultative document or other proposal considered by the Basel Committee.
Further, the letter requests the GAO prioritize each proposal or concern from the federal banking agencies related to:
- Any proposals or concerns from the federal banking agencies that did not receive a fulsome response by the Basel Committee.
- Any evidence or rationale supporting the requirement that a “corporate entity (or parent) must have securities outstanding on a recognized securities exchange for an exposure to that entity (or parent) to be eligible for the reduced risk weight for investment-grade corporate exposures;”
- The absence of a tailored approach to “high-fee revenue banks under the Basel III Endgame business-indicator approach to operational risk capital”;
- The calibration of the “scaling factor, multiplier, dampener, and other coefficients for that business-indicator approach”; and
- The calibration of the “correlation factors and the profit-and-loss attribution test thresholds for the models-based measure of market risk capital.”
Agencies extend comment period on proposed rules to strengthen large bank capital requirements
On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.
Agencies issue final rule to modernize Community Reinvestment Act regulations
On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.
For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.
Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.
Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.
EBA report recommends environmental and social risk enhancements for financial sector
On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.
Fed finalizes rule establishing capital requirements for supervised insurers
On October 6, the Fed approved a final rule to implement a rule establishing capital requirements for insurers it supervises. The final rule includes the Building Block Approach (BBA) framework, which is a regulatory framework for assessing capital requirements for insurance companies, tailored to their specific risks by leveraging state-based requirements. It sets a minimum standard comparable to the 8 percent minimum total capital ratio for insured depository institutions (IDIs).
Specifically, the rule requires a Fed-supervised insurance organization (SIO) to aggregate the available capital and required capital of its top-tier company with its subsidiaries to determine whether the aggregate ratio meets the Board’s minimum requirement and “capital conservation buffer.” Among other things, the final rule gives SIOs two options to show compliance with Section 171(b) of Dodd-Frank: (i) demonstrate that it meets, on a fully consolidated basis, the minimum risk-based capital requirements that apply to IDIs; or (ii) demonstrate that it meets the minimum IDI risk-based capital requirements on a partially consolidated basis, excluding the assets and liabilities of certain subsidiary insurers. Should SIOs choose the second option, there are two possible treatments for unconsolidated insurance subsidiaries: (i) “a deduction from qualifying capital of the aggregate amount of the outstanding equity investment in the subsidiary, including retained earnings”; or (ii) “inclusion of the net investment in the subsidiary as an asset subject to a risk weight of 400 percent, consistent with the current treatment of certain equity exposures under the regulatory capital rules applicable to IDIs.”
Governor Michelle Bowman commented that although she supports the final rule, she cannot support the delegation of authority to staff within the current package. Concerned that the package grants broad authority to staff to make various determinations regarding the rule’s application, Bowman argues that the Board should have the opportunity to review specific cases where such authority would be exercised and suggests that it would be more appropriate to establish clear guidelines for the use of delegated authority in the context of actual determinations.
The Fed noted that the final rule is “substantially similar” to the 2019 proposed rule. The final rule is effective on January 1, 2024.