(Yahoo!Finance) - US regulators are proposing that big banks increase their capital levels to protect against future blowups following a regional banking crisis, one of the most sweeping overhauls of how lenders are regulated since the 2008 financial crisis.
Banks affected by the changes will see an aggregate 16% increase in their capital requirements. Regulators say the increase would primarily affect the largest banks and that most have enough capital already to comply. Capital is the buffer banks have to hold to absorb future losses.
Regulators also proposed changes in how these banks assess risks and widened the scope of the new rules to institutions with as few as $100 billion in assets, meaning roughly 30 banks would be subject to the same calculations.
That would include giants such as JPMorgan Chase (JPM) and Bank of America (BAC) as well as midsized regional banks such as Fifth Third (FITB) and Regions (RF).
The impact will differ from bank to bank depending on their operations. Agency officials said the giants of the industry that have huge trading desks and coast-to-coast franchises will see capital requirements rise by 19% on average, while those with more than $250 billion in assets will see an average rise of 10%.
The smaller banks with $100-$250 million in assets will see an average rise of 5%. A number of mid-sized regional banks fall in this category.
Officials argue the changes are needed to make lenders stronger, more resilient and better prepared for shocks like the crisis of this spring, when the failures of Silicon Valley Bank, Signature Bank and First Republic triggered deposit withdrawals across the banking world.
"Recent events demonstrated the effects that stress at a few large, regional banking organizations could have on the stability, public confidence, and trust in the banking system," said acting Comptroller of the Currency Michael Hsu.
"While the recent events may be attributed to a variety of factors, the effect on financial stability supports further alignment of the regulatory capital framework across all large banking organizations with $100 billion or more of assets."
The proposed changes unveiled Thursday are part of the US version of an international accord known as Basel III that was developed by the Basel Committee on Banking Supervision, and follow a nine-month-long review conducted by Fed vice chair for supervision Michael Barr.
The goal of the Basel committee – which was convened by the Bank for International Settlements in Basel, Switzerland – was to set global regulatory capital standards so that banks would have enough in reserve to survive crises.
The last version of this accord was agreed to in 2017, but plans to roll it out in the US were delayed by the COVID-19 pandemic.
The new capital proposals are expected to face pushback from the banking industry, which argues that lenders are much more resilient than they were during the 2008 financial crisis and that higher requirements could restrict lending.
"As you raise capital requirements, it makes loans and capital markets more expensive, and that’s permanent," Greg Baer, president of the Bank Policy Institute, told Yahoo Finance. "It becomes a permanent loss to the economy."
Regulators will accept comments on this proposal through Nov. 30. Some parts of the proposal would be phased in over three yers, starting in July 2025. All rules would be in place by July 2028.
A key component of these new rules will be higher "risk weights" applied to certain assets banks hold.
The riskier the assets are, the higher the weights and the more capital banks will be required to set aside to absorb any future losses.
These assets can range from Treasuries and mortgages to derivatives and cryptocurrencies.
Another important change is how banks assess future risks. Banks will also no longer be able to rely on internal models to estimate how much they could lose on loans — and therefore how much capital should be held against assets such as mortgages.
The fear from regulators is that the internal bank models can underestimate these risks. Instead, regulators will impose uniform standards.
Regulators are also concerned about how banks evaluate the risks from market swings, trading losses and unexpected operational developments such as litigation.
Thus banks would have to model market risks at the level of individual trading desks for particular asset classes, instead of at the firm level. They can continue to use their own internal models for that evaluation.
Banks with big trading desks could see higher capital requirements, as a result.
As for unexpected operational events, such as litigation expenses, banks would have to use a standardized approach provided by regulators. Banks worry this will punish lenders that rely on non-interest fee income, such as credit card fees.
Another big change announced Thursday is that banks with $100 billion in assets or more would have to count any unrealized available-for-sale securities losses against their regulatory capital.
That last rule would reverse a policy put in place last decade when US supervisors decided most small and mid-sized institutions could opt out of deducting paper losses on bonds from key regulatory capital levels.
In essence, these banks were allowed to report assets that were stronger in theory than they would be in practice.
As Silicon Valley Bank — and the broader investing public — found out in March.
Banks with $100 billion or more in assets will also have to comply with a supplementary leverage ratio requirement and apply the countercyclical capital buffer.
Agency officials said another way to look at the changes in total is that all banks that are part of the changes will be asked to hold an additional 2 percentage points of capital.
They said that most banks have enough capital now but those that don't would be able to build the required amounts in two years.
