Insights

10 November 2023

Key points in the Federal Reserve's November Supervision and Regulation Report

Federal regulators are turning up the heat on big banks, proposing an array of tougher capital, debt, and operational standards.

The proposals are laid out in the Federal Reserve’s latest Supervision and Regulation Report. The semiannual report provides an overview of regulatory and supervisory developments relating to the banking system.

The planned changes come as watchdogs aim to boost resiliency after recent market stresses exposed lingering vulnerabilities. 

While stoppages short of a 2008-style crisis, episodes of runs on deposits at major banks have regulators rethinking their oversight approach. Policymakers want to ensure large firms can withstand severe downturns without taxpayers footing the bill.

MBK Search presents the key regulatory takeaways from the report that compliance and risk professionals should pay attention to.


New Capital Rules Target Biggest Banks

The Federal Reserve is moving forward with plans to increase capital requirements for the nation’s largest banks substantially. The proposed rules aim to implement the final components of the international Basel III agreement and apply to banks with over $100 billion in assets. 

According to the proposal, the new requirements are estimated to result in a 16% aggregate boost in common equity capital across large banks. However, the impact would hit the hardest and most complex firms. These largest banks would see much greater increases to their capital minimums than smaller regional banks meeting the $100 billion asset threshold.

Banks would begin a multiyear transition period starting in 2025 before fully complying with the new standards by 2028. This extended timeline allows banks to meet the heightened capital expectations gradually. 

The proposal also includes adjustments to how regulators calculate capital surcharges for banks deemed systemically important, known as G-SIBs. The changes would better align these extra capital requirements with each bank’s risk profile. 

Requirements for Long-Term Debt Considered

In addition to heightened capital standards, regulators want big banks to maintain long-term debt that could absorb losses if the banks were to fail. The Federal Reserve has proposed rules requiring large regional banks with over $100 billion in assets that are not globally systemically important to maintain minimum amounts of long-term debt for resolution purposes.

The long-term debt requirements apply only to the nation’s biggest global banks. Expanding the rules to additional large regional banks aims to enhance financial stability further and give regulators more options if a large bank nears collapse. Requiring these banks to have loss-absorbing long-term debt would reduce reliance on taxpayer bailouts.

Banks Pressed to Prepare for Emergency Fed Funding

Regulators updated guidance urging banks to prepare for accessing emergency funding from the Federal Reserve through the discount window if needed. The guidance presses banks to operationally test and incorporate the discount window into their contingency funding plans.

Maintaining readiness to tap the discount window as a backup source of liquidity could help banks manage any unforeseen liquidity crunches. Given its association with the financial crisis, the Fed aims to reduce any hesitation some banks may still have over utilizing the discount window. Officials want banks to view it as a routine tool for contingency planning purposes.

Novel Banking Activities Face Enhanced Oversight

The Federal Reserve launched a new supervision program focusing on novel crypto, fintech, and tech-based banking activities. The initiative will partner with existing bank examination teams to strengthen oversight of these innovative bank offerings.

Regulators want to ensure the risks associated with new digital asset, blockchain, and complex bank-fintech partnership activities are properly managed. The targeted reviews will help examiners stay current on fast-evolving services and address any gaps in risk management.

Principles Guide Banks on Climate Risks

The Federal Reserve and other agencies issued guidance laying out clear supervisory expectations for large banks to address climate-related financial risks. The principles guide governance, risk management, scenario analysis, and public disclosure related to climate impacts.

While stopping short of imposing new concrete requirements, regulators want banks to properly account for climate impacts like severe weather events in their planning and operations. Examiners will assess bank practices in this area and may issue supervisory findings if banks fall short.

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