Regulators announce ‘Basel III endgame’ rules for large US banks

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US bank regulators have announced a sweeping set of tougher capital rules for the country’s large lenders, which could cost the six largest institutions tens of billions of dollars collectively, in their most comprehensive effort in more than a decade to fortify the financial system.

The new framework, which was proposed by the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, would apply to banks with more than $100bn in assets. It would spare smaller institutions like community banks, but capture larger regional lenders that previously were not subject to more stringent requirements on capital, which is used to absorb losses.

Regulators will give banks until the beginning of 2028 to comply with the rules.

The regulators say the new rules will make banks less prone to the types of financial distress that hit in 2008 and, to some degree, the recent turmoil this spring, which resulted in three of the four largest failures of federally insured banks in US history. The regulatory overhaul also aims to bring the US into compliance with international standards — the so-called Basel III endgame reforms — stricter rules that most jurisdictions globally have already implemented.

Agency officials on Thursday said on average capital requirements for the so-called global systemically important banks (G-Sibs) are estimated to rise by 19 per cent. That was less than the 20 per cent or more that some on Wall Street feared regulators would impose.

Institutions with $250bn or more in assets could be subject to an increase of 10 per cent, while banks with assets in excess of $100bn could face a 5 per cent rise.

Taken together, that would amount to banks needing to maintain an additional 2 percentage points in capital beyond current levels, which officials said most lenders would be able to service immediately.

“The proposal would improve the resilience of the US banking system by modifying capital requirements for large banking organisations to better reflect their risks and apply more transparent and consistent requirements,” the regulators said on Thursday.

The biggest change has to do with how the banks measure the riskiness of their loans and investments. Banks have long been allowed to use their own judgment and models to do that. The new rules allow regulators to determine how risky they think particular loans and investments are and apply that assessment uniformly to all of the banks.

The rules, which are subject to a public comment period that ends in November and are due to be finalised next year, are set to be phased in over a three-year period beginning in July 2025. Regulators on Thursday said that would give lenders “sufficient time to adjust to the changes while minimising any potential adverse impact”.