U.S. Banks Get a Reprieve with Expected Toned Down Capital Requirements on Basel III Endgame Revamp

On September 10, 2024, the U.S. Federal Reserve, through prepared remarks from Vice Chair for Supervision Michael Barr, revealed expected changes to U.S. banks' capital requirements as part of the still-pending implementation of Basel III Endgame. The slimmed-down proposal will likely increase the largest banks' regulatory capital requirements by approximately 9% for global systemically important banks. Initially introduced in July 2023, the proposal was at first expected to require banks to increase capital by approximately 19%. Additionally, regional banks with assets of more than $100 billion will be required to recognize unrealized gains and losses on securities in their regulatory capital, representing an approximately 3% to 4% increase in capital requirements overtime. The revision comes after banks and other parties cited the potentially adverse impact of substantially higher capital requirements for U.S. banks.

"With the expected changes, the regulators are hoping to strike a balance between strengthening bank stability and limiting the costs of increasing bank capital requirements," said John Mackerey, Senior Vice President, Sector Lead, North American Financial Institutions Ratings at Morningstar DBRS. He adds: "Although, implementation differences and significant variations of requirements between banks in the U.S. and banks in other jurisdictions will remain."