WASHINGTON— Federal Reserve Vice Chair for Supervision Michelle Bowman said Thursday the Fed, FDIC and Office of the Comptroller of the Currency will soon unveil a broad package of capital-rule changes that would complete the final U.S. phase of Basel III while modestly easing the overall burden on large banks and reducing capital requirements somewhat more for smaller institutions.
Speaking at the Cato Institute Policy Forum: Basel III and Bank Capital Rules in Washington, Bowman said the agencies’ coming proposals are intended to eliminate overlapping requirements, better align capital standards with actual risk and curb incentives that have pushed lower-risk activities—such as mortgage lending and servicing—out of the banking system and toward nonbanks.
Bowman said the package will address all four major pillars of the capital framework for the largest banks: stress testing, the supplementary leverage ratio, Basel III risk-based capital rules and the global systemically important bank, or G-SIB, surcharge. She said the Basel III proposal would streamline the framework by replacing duplicative calculations with a single approach for the largest banks, while recalibrating requirements for credit risk, operational risk, market risk and credit valuation adjustment exposure.
For smaller and less complex institutions, Bowman said regulators are also moving to update the broader “standardized approach” for risk-based capital requirements, alongside earlier proposed changes to the community bank leverage ratio. She said those revisions are designed to simplify compliance, better reflect risk in areas such as mortgages, consumer lending and business lending, and preserve access to credit for households and businesses.
A major element of the package would revise the G-SIB surcharge, which Bowman said has drifted away from actual systemic risk and has risen over time partly because of inflation and economic growth rather than greater danger to the financial system. She said the proposal would realign the surcharge more closely with international standards, index it to economic growth going forward and adjust the treatment of short-term wholesale funding and other systemic indicators.
Overall, Bowman said the Basel III proposal would produce a small increase in requirements for the largest banks, while the G-SIB changes would modestly reduce surcharge levels, leaving the combined effect as a slight overall reduction. She added that smaller banks focused on traditional lending would see somewhat larger reductions, which she argued would preserve resilience while improving banks’ ability to support the real economy.
Bowman said the proposals, expected to be published in the coming week, would mark the first major step in a broader review of the U.S. capital framework and move regulators closer to fulfilling the country’s long-delayed commitment to implement the 2017 Basel III agreement.