WASHINGTON — Two Federal Reserve governors voted against a proposal to increase risk-based capital requirements Thursday afternoon.
Fed. Govs. Michelle Bowman and Christopher Waller, the two remaining board members appointed by former President Donald Trump, expressed skepticism that the proposed rule charges — part of the so-called Basel III endgame — were necessary to preserve stability in the banking system.
"In my view, there is insufficient evidence that the benefits produced by this proposal would justify the costs," Bowman said in a written statement released before the board's official vote to issue the rulemaking proposal. "The proposed revisions under consideration have not been directed by Congress and are not compelled by a new evolution or identified weakness in the U.S. banking system."
Bowman has been
Waller has kept his opinions about regulatory reform closer to the vest in recent months. In his dissent on Thursday, he expressed a view that the new regulatory requirements would pass higher costs onto consumers or that certain lending activities would migrate outside the regulated banking system into less-regulated nonbanks.
He also noted the proposals, which impose standardized risk-capital rules on all banks with at least $100 billion of assets, could be in violation of the tailoring rules called for by the Dodd-Frank Act of 2010 and amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
"It is unclear to me whether this proposal meets that statutory bar," Waller said.
The notice of proposed rulemaking, which is being rolled out by the Fed,
The cross-agency package makes two primary sets of changes: it standardizes risk-weighting rules for credit risk, market risk, operating risk and credit valuation risk — which applies to losses on certain derivatives contracts. In doing so, it erases the $250 billion threshold for such requirements and eliminates the ability for banks to determine their own risk-based capital needs. The rule change would also amend the capital surcharge applied to global systemically important banks (GSIBs).
The proposal also calls for a few key changes related to this year's bank failures. It would force banks with between $100 billion and $250 billion of assets to include unrealized gains and losses on securities into their capital calculations. Previously, such banks could opt out of factoring in these paper losses or gains. The rule change would also make that category of bank comply with supplementary leverage ratio requirements and the countercyclical capital buffer if and when it is raised above zero.
Both Bowman and Waller said they were willing to support some form of regulatory or supervisory reform, but noted they were opposed to this specific brand of change.
"To be very clear, I am open to considering proposals to improve capital regulation, particularly evidence-based proposals that would address known deficiencies and shortcomings," Bowman said. "When the board is considering changes to the capital framework, particularly significant increases in capital, we must carefully weigh the trade-offs of increased safety from higher capital levels, and the costs to banks, consumers, businesses, and the broader economy. We must also factor in the broader regulatory landscape, and how changes to capital regulations may complement, overlap, or conflict with other regulatory requirements."
Fed Vice Chair for Supervision Michael Barr, the chief architect of the proposed changes, issued a statement in support of the new plans, noting that they were necessary for ensuring banks are adequately prepared to handle the risks on their balance sheets.
He also noted that the public comment period for the proposal has been extended beyond the traditional 90-day window — a response to calls from industry to do so. He emphasized the importance of transparency in the process as well.
"We will be vigilant in working to avoid unintended consequences and I encourage commenters to provide us with their analyses on all of the issues presented," Barr said. "The extended 120-day comment period is appropriate and will allow all parties adequate time to fully analyze the issues presented in the rule. We will be attentive to those comments and look forward, as always, to the public comment process."
Fed Chair Jerome Powell also noted his support for the changes.
"As the financial system evolves, it is important that regulation evolve with it," Powell said. "Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary."
