While U.S. banking regulators scaled down their initial plans to toughen banks’ capital requirements, the revised proposals are still a positive for the banking industry from a credit perspective, says Moody’s Ratings.
Last week, vice chair of the U.S. Federal Reserve Board, Michael Barr, outlined the U.S. banking regulators’ revised plans for implementing the final stage of the post-crisis reforms to the bank capital rules — known as the Basel III endgame.
The regulators dramatically revised their proposals in response to strong pushback from the financial industry. Among other things, the updated proposals would increase the common equity tier 1 capital requirements for the biggest banks by 9% — compared with the 19% increase that was planned under the regulators’ initial proposals, Moody’s noted.
Similarly, for smaller banks, the new proposals would increase their capital requirements by between 3.0% and 4.5%, down from the 6.0% increase that was projected under the regulators’ original plans.
Despite the softening of regulators’ expectations, the rating agency said the capital demands in the revised proposals are still credit positive for the banks.
For instance, the revised proposals would require the big banks to “better incorporate interest rate risk in their regulatory capital, thereby helping address a problem that played a major role in U.S. banking stress in March 2023,” Moody’s said.
Additionally, the rating agency noted that the increase in capital requirements for smaller banks may be larger than the Fed suggested in the long run.
“It is also positive that the three U.S. banking regulatory agencies appear close to an agreement on the path forward after being unable to agree on various aspects of the 2023 proposed rule,” Moody’s said, adding that the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. worked with the Fed in developing the latest proposals.
Additionally, Moody’s noted that the revised proposal is more closely aligned with the final Basel III framework that was agreed to by global policymakers in 2017.
“It is also more aligned with how other major jurisdictions are implementing the framework,” the rating agency said, adding that this should help prevent further divergence in cross-border capital rules.