Will regulators hit the gas or brakes on remaining post-Basel reforms?
By Kyle Campbell
For more than a year, a once ambitious bank regulatory reform agenda has largely been on hold as agencies deal with the fallout from last summer’s much maligned joint capital proposal. Now that the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are in apparent agreement on a path forward for the so-called Basel III endgame, regulators are poised to work through their backlog of joint initiatives, including expanded long-term debt requirements and new liquidity standards….The Fed, the FDIC and the OCC have been eyeing a long-term debt expansion since 2022, when they issued what is known as an advanced notice of proposed rulemaking — a precursor to a formal rulemaking process — before issuing an official proposal last September. But finalizing that rule while risk-based capital changes are still pending could have significant unintended consequences, said Karen Petrou, managing partner of Federal Financial Analytics. The proposal would set long-term debt requirements at each impacted bank at the greater of 6% of total risk-weighted assets, 3.5% of average total consolidated assets or 2.5% of total leverage exposure if the bank is subject to the supplementary leverage ratio. Because the Basel III endgame proposal would realign the risk-weighting calculus, Petrou said neither banks nor regulators can know the impact of the long-term debt requirement until the capital rules are established. “The long-term debt rule can make no sense until it’s understood in the capital context when it applies. To do long-term debt first and capital rules second is a mistake,” she said, adding that doing so “opens [regulators] up to substantive challenge,” if not a procedural one. Petrou said the calibration of capital rules could bring similar complications to other pending and prospective changes, including policies relating to liquidity management, discount window usage and the treatment of uninsured deposits. But none quite so directly as long-term debt.