Risk & Compliance

Fed Proposes Simpler Capital Rules for Banks

The Fed's proposed method for calculating minimum capital requirements "significantly simplifies our capital regime while maintaining its strength."
Matthew HellerApril 11, 2018

The U.S. Federal Reserve has proposed a new way of calculating a bank’s minimum common equity capital requirement in an effort to ease the regulatory burden on banks.

Since the financial crisis, banks have been required to hold a minimum amount of capital as a cushion against a future economic shock.

In its proposal released on Tuesday, the Fed said it would introduce a “stress capital buffer” (SCB) that would “produce capital requirements for large banking organizations that are firm-specific and risk-sensitive.” With the proposed changes, large firms would be required to meet 14 capital-related requirements, instead of the current 24.

“Our regulatory measures are most effective when they are as simple and transparent as possible, and this proposal significantly simplifies our capital regime while maintaining its strength,” Randal K. Quarles, the Fed’s vice chairman for supervision, said in a news release.

“It is a good example of how our work can be done more efficiently and effectively, and in a way that bolsters the resiliency of the financial system,” he added.

Quarles, a Trump appointee to the Fed, has pledged to make regulation less burdensome for Wall Street.

The Fed said the SCB would combine its forward-looking stress test results with its non-stress capital requirements. Thus, in the case of a bank that has a common equity tier 1 capital ratio of 9%, if the ratio declines to 6% under the hypothetical severely adverse scenario of the stress test, its SCB for the coming year would be 3%.

Adding in the minimum 4.5% capital requirement, the hypothetical bank’s requirement for the coming year would be 7.5%.

The board estimates that the proposed changes will generally maintain or somewhat increase the amount of capital required for the largest, or global systemically important, banks and generally decrease modestly the amount required for most non-GSIBs.

Since the first stress tests in 2009, the common equity capital ratio of bank holding companies has more than doubled from 5.5% to 12.1%, reflecting an increase of more than $720 billion in capital to a total of $1.2 trillion.