Barr outlines new Basel III Endgame proposals
10 September 2024 US
Image: Orhan_脟am/stock.adobe.com
Michael Barr, vice president for the Supervision Board of Governors of the Federal Reserve System, reviewed the proposals for Basel III Endgame.
Opening the discussion at the Brookings Institute in Washington, DC, Barr referred to this project as both 鈥渢echnical鈥� and 鈥渃onsequential鈥�. He adds: 鈥淭his process has led us to conclude that broad and material changes to the proposal are warranted.鈥�
He stated that there are benefits and costs to increasing capital requirements, and the changes that are to be made will 鈥渂ring these two important objectives into better balance, in light of the feedback we have received鈥�.
The re-proposals would increase aggregate common equity tier 1 capital requirements for the global systemically important banks (G-SIBs) by nine per cent.
For other large banks that are not G-SIBs, the impact from the re-proposal would mainly result from the inclusion of unrealised gain and losses on their securities in regulatory capital, Barr said, estimated to be equivalent to a three to four per cent 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.
Barr鈥檚 discussion on the new Basel III Endgame proposals recommends eliminating the minimum haircut for securities financing transactions (SFTs).
He began with an overview of the changes he will recommend to the capital requirements for credit risk, which protect against the risk that a bank's loans will not be fully repaid.
These changes include reducing the risk weights for residential, real estate, and retail exposures; and extending the scope of the reduced risk weight for certain low risk corporate debt.
In addition, Barr recommended that the board not adopt the capital treatment associated with minimum haircut floors for SFTs.
The proposal included heightened capital requirements for repo style transactions and eligible margin loans that did not meet minimum margin requirements.
鈥淲hile consistent with the Basel standard, several other major jurisdictions have not adopted this approach 鈥� not adopting the minimum haircut floors will allow time to seek greater international consensus on this important topic, before deciding on whether and how to implement such an approach in the United States,鈥� Barr comments.
Continuing with his line of proposals, Barr recommended that the board adjust the capital treatment for client cleared derivative activities by reducing the capital required for the client facing leg of a client cleared derivative.
He believes this change would 鈥渂etter reflect the risks of these transactions鈥�, which are highly collateralised and subject to netting and daily margin requirements.
Furthermore, the decision would also avoid disincentives to central clearing, he added.
The proposal would have increased the extent to which client-cleared derivatives contribute to a bank's G-SIB surcharge, to promote consistency of the measure.
According to Barr, commenters on the proposal argued that the measure might result in higher costs and more volatility for derivative end users and might reduce incentives to provide clients' access to central clearing.
Barr continued: 鈥淐entral clearing of derivatives is a critical tool that can help improve transparency and reduce systemic risk. To avoid disincentives for client clearing, I intend to recommend to the board that we not adopt the proposed changes to capital requirements associated with client clearing.鈥�
In his conclusion, Barr said that the journey to improve capital requirements since the global financial crisis has been a long one, and the Basel III Endgame regulation is an important element of this effort.
He added: 鈥淭he broad and material changes to both proposals that I've outlined today would better balance the benefits and costs of capital in light of comments received, and result in a capital framework that appropriately reflects the risks of bank activities and is tiered to the banking sector.
鈥淭hey also bring the proposals broadly in line with what other major jurisdictions are doing. And what does this all mean? A safer and fairer banking system.鈥�
Opening the discussion at the Brookings Institute in Washington, DC, Barr referred to this project as both 鈥渢echnical鈥� and 鈥渃onsequential鈥�. He adds: 鈥淭his process has led us to conclude that broad and material changes to the proposal are warranted.鈥�
He stated that there are benefits and costs to increasing capital requirements, and the changes that are to be made will 鈥渂ring these two important objectives into better balance, in light of the feedback we have received鈥�.
The re-proposals would increase aggregate common equity tier 1 capital requirements for the global systemically important banks (G-SIBs) by nine per cent.
For other large banks that are not G-SIBs, the impact from the re-proposal would mainly result from the inclusion of unrealised gain and losses on their securities in regulatory capital, Barr said, estimated to be equivalent to a three to four per cent 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.
Barr鈥檚 discussion on the new Basel III Endgame proposals recommends eliminating the minimum haircut for securities financing transactions (SFTs).
He began with an overview of the changes he will recommend to the capital requirements for credit risk, which protect against the risk that a bank's loans will not be fully repaid.
These changes include reducing the risk weights for residential, real estate, and retail exposures; and extending the scope of the reduced risk weight for certain low risk corporate debt.
In addition, Barr recommended that the board not adopt the capital treatment associated with minimum haircut floors for SFTs.
The proposal included heightened capital requirements for repo style transactions and eligible margin loans that did not meet minimum margin requirements.
鈥淲hile consistent with the Basel standard, several other major jurisdictions have not adopted this approach 鈥� not adopting the minimum haircut floors will allow time to seek greater international consensus on this important topic, before deciding on whether and how to implement such an approach in the United States,鈥� Barr comments.
Continuing with his line of proposals, Barr recommended that the board adjust the capital treatment for client cleared derivative activities by reducing the capital required for the client facing leg of a client cleared derivative.
He believes this change would 鈥渂etter reflect the risks of these transactions鈥�, which are highly collateralised and subject to netting and daily margin requirements.
Furthermore, the decision would also avoid disincentives to central clearing, he added.
The proposal would have increased the extent to which client-cleared derivatives contribute to a bank's G-SIB surcharge, to promote consistency of the measure.
According to Barr, commenters on the proposal argued that the measure might result in higher costs and more volatility for derivative end users and might reduce incentives to provide clients' access to central clearing.
Barr continued: 鈥淐entral clearing of derivatives is a critical tool that can help improve transparency and reduce systemic risk. To avoid disincentives for client clearing, I intend to recommend to the board that we not adopt the proposed changes to capital requirements associated with client clearing.鈥�
In his conclusion, Barr said that the journey to improve capital requirements since the global financial crisis has been a long one, and the Basel III Endgame regulation is an important element of this effort.
He added: 鈥淭he broad and material changes to both proposals that I've outlined today would better balance the benefits and costs of capital in light of comments received, and result in a capital framework that appropriately reflects the risks of bank activities and is tiered to the banking sector.
鈥淭hey also bring the proposals broadly in line with what other major jurisdictions are doing. And what does this all mean? A safer and fairer banking system.鈥�
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