After a lengthy delay in part caused by the need to remove ratings from U.S. capital regulation, the U.S. banking agencies have now proposed a framework to implement the global Basel III capital standards. They have, however, gone beyond Basel III not only to delete ratings, but also to rewrite the overall regulatory-capital framework in the United States. This would govern most insured depositories and holding companies up to the threshold (still being finalized) for U.S. banks that would not only come under these rules, but also to U.S./global surcharges. In this analysis, FedFin assesses the NPR to rewrite the numerator in the capital equation – that is, the proposed standards to make capital a more robust form of risk-absorption based principally on tangible common equity. This NPR would also hike basic U.S. capital to the higher ratios demanded in Basel III, including with regard to new capital-conservation and counter-cyclical buffers. The NPR would also apply to the largest banks the Basel III leverage charge of three percent to on- and off-balance sheet assets, thus extending the U.S. leverage standards (otherwise toughened for all banks) to off-balance sheet holdings). New prompt corrective action (PCA) standards would also apply if insured depositories transgress the new standards. Much in this NPR is based on the “Collins Amendment” in the Dodd-Frank Act, which sets minimum capital requirements more stringently than the global Basel III standards.
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