While speaking at an event in Washington DC, Michael Barr, the US FED Vice Chair for Supervision, recently announced the intent to re-propose the Basel 3 endgame and G-SIB surcharge rules amid significant market pushback and uncertainty owing to the looming national elections. As per the July 2023 communications, the US Basel 3 endgame rules were expected to be finalized by Q3 of 2024, with the implementation expected by July 2025. Considering the current status of these rules, these timelines are expected to be delayed.
The changes in the endgame re-proposal are expected to cover all major areas of the rule, including credit, operational, and market risks. Banks with assets between USD 100 and USD 250 billion would no longer be subject to the endgame changes, other than the requirement to recognize unrealized gains and losses of their securities in regulatory capital. The re-proposed rules are expected to increase aggregate common equity tier 1 capital requirements for largest and most complex banks by 9%, as opposed to the 16% increase conveyed by US regulatory authorities at the time of the first proposal in July 2023. Key changes recommended and outlined by Michael Barr include:
For credit risk capital requirements, these involve reducing the risk-weights for residential real estate and retail exposures, extending the scope of the reduced risk weight for certain low-risk corporate debt, and eliminating the minimum haircut for securities financing transactions.
For equity exposures, the re-proposal could significantly lower the risk-weight for tax credit equity funding structures, given the lower inherent risk in these structures compared to many other equity investments.
For operational risk, the re-proposed rules are expected to reduce operational risk capital requirements for investment management activities to reflect the smaller historical operational losses for these activities relative to income.
For market risk, the re-proposal could include changes to facilitate banks' ability to use internal models for market risk by introducing a multiyear implementation period for the profit and loss attribution tests and adjust the capital treatment for client-cleared derivatives activities by reducing the capital required for the client-facing leg of a client-cleared derivative.
For banks with assets between USD 250 and USD 700 billion that are not global systemically important banks (G-SIBs) or internationally active, the re-proposal would apply the new credit risk and operational risk requirements; however, it would apply the frameworks for market risk and credit valuation adjustment (CVA) frameworks only to firms that engage in significant trading activity.
For large banks with assets between USD 100 and USD 250 billion, the re-proposal would not apply the credit risk and operational risk frameworks of the expanded risk-based approach to these banking organizations, maintaining a simpler capital framework for these less complex firms.
The G-SIB re-proposal is expected to improve the calculation of the capital surcharges for G-SIBs by reflecting changes in the global banking system since the Board adopted the G-SIB surcharge in 2015.
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