Halting Pro-Cyclical Policy Measures and Increases in Regulatory Capital

In the wake of the U.S. banking turmoil in March 2023, federal bank regulators are considering a sweeping set of proposed changes that would increase capital requirements for the nation's largest banks by as much as 20%, which could significantly affect liquidity available for commercial real estate transactions, impact asset values, and influence economic growth.

The proposed changes to large bank capital requirements would implement the final components of international banking regulations known as the Basel III “endgame.” The agencies’ proposal, if adopted, would have a long phase-in period and not impact community banks.

The dissenting votes of some regulators on the proposed rulemaking revealed rare disagreement, and Fed Chairman Jerome Powell signaled a cautious approach to consideration of any final rule as a public comment period continues.

Position

The Roundtable continues to urge federal regulators and other policymakers to avoid any pro-cyclical policies, such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models.

Federal bank regulators are considering a sweeping set of proposed changes that would increase capital requirements for the nation’s largest banks by as much as 20%, revising the regulatory capital framework for banking organizations with total assets of $100 billion or more. See the 1,100-page proposed rulemaking and Interagency Overview  July 27, 2023)

 

Background

The Fed, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the proposal — subject to public comment before a final vote — in July 2023.

Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 17, 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

Fed Chairman Powell voted for the proposal, but noted a significant tone of caution, stating, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.” He added, “While there could be benefits of still higher capital, as always we must also consider the potential costs.” (Federal Reserve Board – Statement by Chair Jerome H. Powell)

Statements were also issued by Fed Governors Michelle W. Bowman and Christopher J. Waller, who voted against the proposal.

MORE ISSUES
MORE ISSUES
Restoring Liquidity in CRE Markets and Protecting Capital Formation
Halting Pro-Cyclical Policy Measures and Increases in Regulatory Capital
Beneficial Ownership & the Corporate Transparency Act
Commercial Insurance Coverage: Pandemic Risks & Natural Catastrophes
SAFE Banking Act: Financial Services for Legal Cannabis-Related Businesses (CRBs)