Basel III Endgame and Fed’s Balancing Act

Blog article

The Fed announced changes to the Call Reports, (FFIEC 031, FFIEC 041, and FFIEC 051) and FFIEC 101, and FFIEC 102 reports to align with the capital rule (the “Rule”) proposed on September 18, 2023. The changes, once finalized, will be effective September 2025 and entail a significant overhaul. To summarize:

• The general instructions for each version of the Call Report (FFIEC 031, FFIEC 041, and FFIEC 051) would be revised to require each bank subject to the expanded risk-based approach under the Rule to file the FFIEC 031.
• Revision of the FFIEC 031 Schedule RC–R, Part I, Regulatory Capital Components and Ratios, to align the calculation of regulatory capital for institutions subject to Category III and IV standards with the calculation used for institutions subject to Category I and II standards, subject to certain transition provisions for components of Accumulated Other Comprehensive Income (AOCI) in the proposed capital rule.
• For FFIEC 101—”Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework”—general instructions to scope in Category III  and IV banking organizations in the reporting criteria, rename and modify Schedule A to update nomenclature in connection with the proposed capital rule revisions, remove Schedule B through Schedule S of the current FFIEC 101 report, and add 15 new schedules.
• For FFIEC 102, currently used for reporting, “ Market Risk Regulatory Report for Institutions Subject to the Market Risk Capital Rule,” the revision entails changes to the reporting criteria for FFIEC 102 to apply to banking organizations subject to Category I, Category II, Category III, or Category IV standards and to banking organizations with significant trading activity. In addition, a separate Supervisory Market Risk Regulatory Report (FFIEC 102a) is to be added, which would function as a companion to the FFIEC 102 report in implementing the proposed capital rule’s revised market risk framework.
  Full details: Proposed revisions

But the fate of the very proposed rule of September 2023 that brought forth the proposal for reporting changes is still unknow. Reuters reported that “in March 2024, testifying before Congress, Federal Reserve Chairman Jerome Powell said officials have begun reconsidering the ‘Basel III endgame’ and did not rule out re-proposing the rule to solicit further feedback, a step that could significantly delay the project and potentially push it into a new presidential administration.” (Reuters March 6, 2024)

It is reported that 97% of the comments received are critical of the Rule and the Fed, facing the concerted push back, is trying to maintain an uneasy balance to maintain its independence.

However, there is a push back to this balancing act itself as well. Peter Conti-Brown of Brookings Institution wrote: “The Fed’s insulation from political interference with respect to monetary policy arises from its need to make decisions about the availability of credit that are not linked to the short-term interests of incumbent political parties. This ‘central bank independence’ is for liberal democracies the world over; its absence is associated with spectacular failures of monetary management… Scrutinizing and responding to comments on the July proposal is a healthy part of the deliberative process. But throwing away regulatory reforms preferred by the party that won the last national election does not preserve Fed independence. It makes a mockery of it.” (“The Basel III Endgame and Fed independence,” March 13, 2024).

The Fed is in a bind and faces an uncertain future with respect to the fate of the proposal. Please stay tuned as the stories unfold and as we bring the updates to these issues.

In the meantime, why not check out our latest whitepaper on the current Basel reforms. We recap the genesis and key objectives of the reforms, explore the key changes, and the current status of implementation around the world. We dive into the detail on how these latest Basel changes are being implemented in key jurisdictions, highlighting similarities and differences, and taking a deeper dive into some of the complexities and challenges – those issues that only arise when you really look at the detail of the changes.

We also discuss what firms should be thinking about now from a practical perspective, from business model changes to the ongoing optimization of the use of regulatory capital, to embracing the latest changes as an opportunity to consider how they are processing data for both internal purposes and regulatory reporting and risk calculations.