Breaking News: Federal Reserve to Revise Basel Endgame Draft Rule on Bank Capital | Major Changes Expected
In a recent announcement, the Federal Reserve's regulatory chief revealed plans for significant revisions to the Basel Endgame draft rule, which aims to increase bank capital. The proposed changes, set to be published in the coming weeks, have been met with strong opposition from the industry and are now subject to a vote by the central bank's board.
Here are some of the key changes outlined in the revised draft:
- Credit Risk: The new draft will lower risk-weights for residential real estate loans and loans to retail customers, addressing concerns raised by lenders about the original proposal. Additionally, a reduced risk weight will be extended to certain investment grade entities that are not publicly traded, including pension funds and mutual funds.
- Equity Exposures: The risk weight for tax credit equity funding structures will be significantly lowered to reflect their lower inherent risks compared to other equity investments.
- Operational Risk: The Fed will scrap a proposed plan to adjust capital charges based on banks' operational loss history, aiming to reduce fluctuations in capital requirements. The proposal will also adjust how fee-based activities are measured to provide more consistency in operational risk assessment.
- Market Risk and Derivatives: Constraints on banks' use of internal models for trading and derivatives activities will be eased in the new draft. The capital treatment for client derivatives that are cleared will also be adjusted to better reflect the risks involved.
- Tiering: Global systemically important banks (GSIBs) and other internationally active banks will face stricter requirements, while large non-GSIBs will have simplified capital requirements. Midsize banks with assets between $100 billion and $250 billion will also see changes in capital requirements.
In conclusion, these revisions to the Basel Endgame draft rule could have significant implications for banks and their operations. By addressing concerns raised by the industry and adjusting capital requirements to better reflect risks, the Federal Reserve aims to create a more stable and resilient banking system. It is important for banks and investors to stay informed about these changes and adapt their strategies accordingly to ensure financial health and compliance with regulations.