The Federal Reserve in the US is preparing to reduce capital requirements for large American banks, reversing some of the safeguards put in place after the 2008 financial crisis.
The announcement came from Michelle Bowman, the Fed’s vice-chair for supervision, during a speech outlining forthcoming regulatory changes.
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Bowman stated that the central bank’s implementation of the Basel III Endgame rules would cause only a “small increase” in capital requirements, which would be offset by other planned adjustments.
Among these is a revision to how the Fed calculates extra capital surcharges for the largest banks, resulting in what she termed a “modest decrease in the surcharges.”
Trade organisations representing US banks said Bowman’s approach reflected careful consideration and welcomed the focus on risk sensitivity and the cumulative impact of capital regulations.
Bowman acknowledged that post-crisis reforms had bolstered financial system resilience but warned against raising capital levels without clear purpose.
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By GlobalDataShe noted that excessive requirements could restrict credit availability and shift financial activity into less-regulated areas, without necessarily improving systemic safety.
Part of this change involves lowering the weight given to short-term funding risks in their calculations.
The new framework will also adjust these buffers for inflation and growth to prevent automatic increases as bank balance sheets expand.
Further details about these proposals are expected next week from US regulators.
“These changes to the capital framework eliminate overlapping requirements, right-size calibrations to match actual risk, and comprehensively address long-standing gaps in our prudential framework,” she said.
Bowman indicated that smaller and less complex US banks could see “slightly larger reductions in capital requirements” compared to their larger counterparts.
Last month, the Federal Reserve proposed a rule to alter how bank examiners assess risk, including discontinuing the use of reputation risk in supervisory decisions and restricting examiners from discouraging banks from providing services to lawful businesses. This draft rule is currently open for public comment.
