Basel Endgame Intentions Announced by US Banking Regulators
On September 9, 2022, the US federal banking regulators announced their intent to revise US regulatory capital requirements to align them with the regulatory capital standards that were finalized by the Basel Committee on Banking Supervision (“BCBS”) in December 2017.1 This announcement is consistent with informal messaging from agency principals and staff but does not address industry concerns regarding the timing and content of the revisions to the US requirements. It also aligns with a recent speech by Vice Chair Michael Barr in which he stated that 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, the BCBS standards do not have the force of law in the United States. Rather, the US banking regulators determine whether and how to apply BCBS standards to US banking organizations. These determinations generally are made through the notice-and-comment process and can result in US approaches that differ from the BCBS approach.
In June 2011, following the financial crisis, the BCBS released significant revisions to the regulatory capital standards known as “Basel III.” These revisions were adopted by the US banking regulators in 2013.3
Basel Endgame
In June 2017, the BCBS finalized revisions to the Basel III regulatory capital standards in a consultation process that the industry refers to as “Basel IV” or the “Basel Endgame.”4 These revisions were extensive and address:
- Changes to risk-weights under the standardized approach
- Restrictions on the use of models under the advanced approaches
- Revisions to the credit valuation adjustment risk framework
- An overhaul of the operational risk framework, including a more explicit operational risk capital charge under the standardized approach
- Refinements to the leverage ratio framework
- Creation of an output floor on the regulatory capital benefits that a banking organization using the advanced approaches can derive relative to the standardized approach
The BCBS intended for national governments to implement most of the Basel Endgame revisions by January 1, 2022, although this deadline was extended until January 1, 2023, due to the COVID-19 pandemic.
In the United States, the federal banking regulators informally signaled that they were considering how to address the Basel Endgame revisions and intended to release a proposed rulemaking on the topic. The proposal has been described as enormous, which is notable given the 1,017-page length of the 2013 Basel III rulemaking. However, timing for the release of a proposal slipped, first during the pandemic and then as agency principals changed at the beginning of the Biden administration. Recent news indicated that the proposal might not be released until 2023, which would give banking organizations little time to implement revisions before an expected compliance date in 2025 (itself being two years after the BCBS deadline).5
Takeaways
The announcement that US federal banking regulators intend to revise US regulatory capital rules to align with the December 2017 standards of BCBS confirms speculation but does not provide clarity on when we can expect a proposal or how much time will be provided for banking organizations to implement a final rule.
The announcement explicitly states that the US regulators intend to focus on the December 2017 revisions made by BCBS. This may mean that US regulators will not consider post-2017 revisions being considered by BCBS and others, such as explicit capital charges for digital assets and climate risk. It also could mean that the US regulators might not address some concerns raised by the banking industry, such as the issues identified with the leverage ratio during the pandemic and that were encountered following the implementation of the stress capital buffer.6
The announcement states that the eventual proposal will not affect community banking organizations. Historically, this was understood to refer to banking organizations that were subject only to the standardized approach. However, it is unlikely that the US revisions will be limited to advanced approaches banking organizations because of the extensive revisions that BCBS made to the standardized approach (e.g., explicit operational risk capital charge for at least some standardized approach banks). Accordingly, it is more likely that banking organizations with less than $10 billion in total assets will be excluded.
1 Press Release, Agencies Reaffirm Commitment to Basel III Standards (Sept. 9, 2022), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220909a.htm. The US federal banking regulators consist of the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”), and Federal Deposit Insurance Corporation (“FDIC”).
2 Michael Barr, Making the Financial System Safer and Fairer (Sept. 7, 2022), https://www.federalreserve.gov/newsevents/speech/barr20220907a.htm.
3 78 Fed. Reg. 62,017 (Oct. 11, 2013); 78 Fed. Reg. 55,339 (Sept. 10, 2013). See our Legal Update on the 2013 revisions: https://www.mayerbrown.com/en/perspectives-events/publications/2013/07/bank-regulators-approve-final-rule-to-implement-ba.
4 Press Release, Governors and Heads of Supervision Finalise Basel III Reforms (Dec. 7, 2017).
5 See Sharon Thiruchelvam, US Banks Anticipate Delay to Basel III Implementation, Risk.Net (May 2, 2022).
6 E.g., Allissa Kline, Big Banks Feel the Pinch From Higher Stress Capital Buffers, American Banker (July 31, 2022). However, Barr’s speech explicitly mentions that the Federal Reserve may consider adjustments to the supplementary leverage ratio, countercyclical capital buffer, and stress testing.
