The federal bank regulatory agencies have announced a proposal to modify certain regulatory capital standards. The aim is to reduce disincentives for banking organizations to engage in lower-risk activities and promote the smooth functioning of U.S. Treasury markets.
Currently, banking organizations are subject to both risk-based and leverage capital requirements. Risk-based capital requirements vary according to the risks of individual exposures, imposing lower requirements on low-risk assets like Treasury securities compared to higher-risk corporate bonds. Leverage capital requirements treat all exposures equally, which can discourage engagement in low-risk activities due to generally higher leverage standards.
The proposed changes target the largest and most systemically important banking organizations by adjusting certain leverage capital standards. These adjustments are intended to ensure that these standards serve as a backstop to risk-based requirements without discouraging participation in low-risk activities. Specifically, the proposal would set the enhanced supplementary leverage ratio for both bank holding companies and their depository institution subsidiaries based on overall systemic risk.
The agencies expect that the total amount of capital maintained by banking organizations will remain largely unchanged following these modifications. In aggregate, tier 1 capital standards for affected bank holding companies are projected to decrease by less than two percent. Some depository institution subsidiaries might experience larger reductions, but restrictions at the bank holding company level would likely prevent this capital from being distributed to external shareholders.
Additionally, conforming changes will be made to other regulations linked to the enhanced supplementary leverage ratio, including total loss-absorbing capacity and long-term debt requirements.
Statements regarding this proposal were issued by Chair Powell, Vice Chair for Supervision Bowman, Governor Barr, Governor Kugler, and Governor Waller.