The Next Steps on Capital Speech by Michael S. Barr, Vice Chair for Supervision at Federal Reserve

Blog article

Vice Chair for Supervision Michael S. Barr gave a speech at the Brookings Institution, Washington, D.C. on September 10, 2024, and indicated that he intended to recommend that the Federal Reserve Board re-propose the Basel endgame and G-SIB surcharge rules. Barr stated that the changes in the endgame re-proposal will cover all major areas of the rule: credit risk; operational risk; and market risk.  In terms of the capital requirements:

• Banks with assets between $100 and $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. 
• Also, the re-proposals would increase aggregate common equity tier 1 capital requirements for the G-SIBs, which are the largest and most complex banks, by 9 percent.  

• For other large banks that are not G-SIBs, the impact from the re-proposal would mainly result from the inclusion of unrealized gain and losses on their securities in regulatory capital, estimated to be equivalent to a 3 to 4 percent increase in capital requirements over the long run.  

• The remainder of the re-proposal would increase capital requirements for non-GSIB firms still subject to the rule by 0.5 percent. 

The goal of the 2023 proposal was to improve the risk sensitivity of the G-SIB surcharge. But given the proposal’s potential impact on certain types of activities, such as client clearing of derivatives, Barr will recommend making changes to the original proposal. 

First, Barr indicated, that he intended to recommend to the Board that the proposed changes to capital requirements associated with client clearing be not adopted, considering that central clearing of derivatives is a critical tool that can help improve transparency and reduce systemic risk and to avoid disincentives for client clearing;  

Second, he indicated, that he intended to recommend that the calculation of the capital surcharges for G-SIBs be improved by reflecting changes in the global banking system since the Board adopted the G-SIB surcharge in 2015. Also, he said that he intended to recommend that the effects from inflation and economic growth be considered in the measurement of a G-SIB’s systemic risk profile. As a result, a G-SIB’s surcharge would not change based simply on growth in the economy.  

Barr indicated that while these proposed changes affect some of the most important aspects of the proposals, the agencies have not made final decisions on any aspect of the re-proposals, including those that are not explicitly addressed in the re-proposal.  

For the full speech is available here