Agencies request comment on proposed rules to strengthen capital requirements for large banks

The key U.S. banking regulators, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (FED) have published a joint press statement to announce the launch of a consultation on a new rule to modify the capital requirements of large financial institutions in the U.S. This move follows the turmoil in the U.S. banking sector earlier this year and aims to strengthen the resilience of large institutions by better aligning capital requirements with underlying risks of institutions. With the changes, the regulators also seek to implement the final components of the Basel III agreement, also known as the Basel III end game.
#### Some details of the proposed new rule are as follows:
The Proposed Rule encompasses a series of modifications designed to establish greater uniformity in the assessment of risk across large banking organizations. To achieve this, the proposal recommends a departure from the existing capital requirements that rely on internal models. Instead, it advocates the adoption of standardized risk-sensitive capital requirements. These newly outlined requirements, termed the „expanded risk-based approach“ would be applicable to banks holding assets exceeding $100 billion, encompassing banking entities subject to Category I, II, III, or IV capital standards.
In this context, it shall be noted that large banks would be required to compute risk-weighted assets (RWAs) using both, the already existing standardized approach and the newly proposed expanded risk-based approach (the internal approach would no longer be accepted). The more conservative of these two calculated risk-weighted asset (RWA) amounts would be applied for purposes of calculating capital requirements for market risk and operational risk. This dual approach intends to uphold a consistent and stringent capital framework across both larger and smaller banking organizations, latter of which typically apply the standardized approach. The approach is illustrated in the following graphic.
Graphic 1 – Approach to the future assessment of RWAs for purposes of capital requirement determination

Furthermore, the regulators propose amendments to the individual assessment of market risk, credit risk, operational risk, and credit valuation adjustment risk for purposes of computing own funds requirements, whereby the market risk assessment would also apply to institutions with trading activities of $5 billion or more, or where such activities account for more than 10% of their total assets.
Specifically, as far as credit risk is concerned the regulators would, among others,
– allow for greater segmentation across exposure categories and flexibility in applying a wider range of risk weights;
– require the use of the Loan-To-Value (LTV) ratio to determine risk weights for real estate exposures;
– raise risk weightings for equity exposures;
– introduce a new standardized approach for assessing market risk from securitizations;
– replace certain credit risk mitigation methods with standardized approaches; or
– revise the collateral haircut approach to include increased netting and diversification benefits, adjusted market price volatility, haircuts, and floors.
Concerning market risk, the regulators primarily propose to adopt the fundamental review of the trading book (FRTB) standards thereby replacing the current VaR (Value at Risk)-based measure with an expected shortfall-based measure and introducing liquidity horizons that would be aligned with underlying risk factors. It shall be noted in this context, that institutions could continue to use an internal model to determine market risk. However, any such internal model would be subject to enhanced model approval and performance and performance requirements.
Furthermore, as quoted from the enclosed fact sheet, the new rule would require institutions to
• Include unrealized gains and losses from certain securities in their capital ratios;
• Comply with the supplementary leverage ratio requirement; and
• Comply with the countercyclical capital buffer, if activated.
Finally, the proposed rule would entirely overhaul the disclosures of in-scope institutions, introducing new standardized disclosure templates that suit the aforementioned adjustments and removing various other qualitative disclosure templates. The key aim is to standardize capital reporting to the largest extent possible to enhance comparability among supervised institutions.
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Concurrently with this consultation, the FED is also launching a second consultation on proposed changes to the risk-based capital surcharges for global systemically important bank holding companies. Specifically, the FED would change the computation of the capital surcharge for the largest and most complex banks. The revisions aim to more closely match the surcharge on capital with each bank’s systemic risk level, notably by assessing a bank’s systemic significance throughout the entire year, as opposed to solely based on year-end figures. Therefore, some risk indicators would be aligned to reflect year-across averages. Furthermore, the FED proposes to revise the computation of the „Short-term wholesale funding“ indicator primarily by re-defining the list of components and assigning appropriate weights as outlined in the consultation. Finally, the FED seeks to revise the FR Y-15 report, which is the underlying report to be filed by institutions on a quarterly basis for the assessment systemic relevance, to enhance consistency and align the report with several risk indicator changes.
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As the above summaries only briefly outline the key content of the consultations, please refer to the original legal documents for more detailed, comprehensive information.