Basel endgame intentions announced by US banking regulators

On September 9, 2022, US federal banking regulators announced their intention to revise regulatory capital requirements in the US to align them with regulatory capital standards that were finalized by the Basel Committee on Banking Supervision (“BCBS”) in December 2017.1 This announcement is consistent with informal messages from agency directors and staff, but does not address industry concerns regarding the timing and content of revisions to US requirements. This also aligns with a recent speech by Vice Chairman Michael Barr in which he said he is committed to implementing enhanced regulatory capital requirements that align with the 2017 BCBS standards.2

Background

Since the 1980s, the BCBS has developed and refined regulatory capital standards for internationally active banking organizations. However, BCBS standards do not have the force of law in the United States. Instead, US banking regulators determine whether and how to apply BCBS standards to US banking organizations. These determinations are generally made through the notice and comment process and may result in US approaches that differ from the BCBS approach.

In June 2011, following the financial crisis, the BCBS published significant revisions to regulatory capital standards known as “Basel III”. These revisions were adopted by US banking regulators in 2013.3

Basel final

In June 2017, the BCBS finalized revisions to the Basel III regulatory capital standards in a consultation process the industry calls “Basel IV” or “Basel Endgame”.4 These revisions were significant and related to:

  • Changes to risk weights under the standardized approach
  • Restrictions on Using Models in Advanced Approaches
  • Revisions to the credit valuation adjustment risk framework
  • An overhaul of the operational risk framework, including a more explicit operational risk capital requirement under the standardized approach
  • Improvements to the leverage ratio framework
  • Creation of a production floor on the advantages in regulatory capital that a banking organization using the advanced approaches can draw compared to the standardized approach

The BCBS expected national governments to implement most Basel Endgame revisions by January 1, 2022, although that deadline was extended to January 1, 2023, due to the COVID-19 pandemic.

In the United States, federal banking regulators have informally signaled that they are considering how to approach the Basel Endgame reviews and intend to issue a regulatory proposal on the subject. The proposal was described as huge, which is remarkable given the 1,017-page length of the 2013 Basel III regulations. However, the timing of a proposal’s release has slipped, first during the pandemic, then when agency heads changed at the start of the Biden administration. Recent news has indicated that the proposal may not be published until 2023, which would give banking organizations little time to implement the revisions before an expected compliance date of 2025 (itself being two years after the BCBS deadline).5

Take away food

The announcement that US federal banking regulators intend to revise US regulatory capital rules to align with BCBS’s December 2017 standards confirms speculation but doesn’t say when we can expect that. a proposal or how much time will be given to banking organizations to implement a final rule.

The announcement explicitly states that US regulators intend to focus on the December 2017 reviews conducted by BCBS. This may mean that US regulators will not consider post-2017 revisions being considered by the BCBS and others, such as explicit capital charges for digital assets and climate risk. It could also mean that US regulators may not address some concerns raised by the banking industry, such as issues identified with the leverage ratio during the pandemic that were encountered following the implementation of the capital buffer. anti-stress capital.6

The announcement indicates that the eventual proposal will not affect community banking organizations. Historically, this meant banks that were only subject to the standard approach. However, the US revisions are unlikely to be limited to advanced approach banking organizations due to significant revisions the BCBS has made to the standardized approach (e.g. explicit operational risk capital requirement for at least some banks standard approach). Therefore, banking organizations with total assets of less than $10 billion are more likely to be excluded.