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Capital & Valuations

Escalating regulatory attention on risk calculations, stress testing, capital planning, and broad risk management—across financial risks as well as operational risks


The federal banking regulators (FRB, FDIC, OCC) will jointly seek to increase the strength and  resilience of the banking system through changes to the large bank capital requirements (all Category I to IV banking organizations with assets of $100+ billion), including applying a broader set of capital  requirements to more large banks and standardizing certain aspects of the capital framework. The  effect of the changes, which would implement the final components of the international capital standards (e.g., the Basel III agreement) in the US as well as markedly change the U.S. “tailoring rules”  (e.g., impose more requirements on all Category II, III, and IV banking organizations), is expected to  vary for each bank based on its activities and risk profile.

The regulators intend for changes to introduce more transparency, consistency, and risk sensitivity to  the measurement of risk-weighted assets. Firms should anticipate regulatory focus across core risk  areas (e.g., operational risk, credit risk, market risk) as well as business lines and corporate functions.

  • Risk-Weightings: Adjustments to risk-weighted capital calculations include:
    • Operational Risk: Standardized approach would use a function of firms’ “business indicator  components” and “internal loss multipliers”.
    • Credit Risk: Expanded risk-based approach with increased “risk sensitivity” from additional criteria  and metrics for differentiation of credit risk within exposure categories and a broader range of risk  weights for various asset classes (e.g., exposures to depository institutions, foreign banks, and  credit unions; subordinated debt; real estate, retail, and corporate exposures).
    • Market Risk: Standardized and internal model approaches for calculating risk-weighted assets for  market risk; introduces the concept of a trading desk and restricts application of the models-based  approach to the trading desk level.
    • Credit Valuation Adjustment Risk: New, standardized approach allows recognizing hedges for  expected exposure component of CVA risk.
    • Securitization Exposures and Equity Exposures.
  • Whole of Business: For all impacted institutions, changes to capital requirements will drive  extensive changes in governance processes, data, models, system infrastructure, internal controls,  and regulatory reporting, which will span both business lines and corporate functions over a  multiyear timeframe. Further, firms (regardless of size) should anticipate that regulators may request  information on practices and data that seem to be a “tier up” from current category levels.


Changes to the capital requirements will also impact:

  • Stress Testing: Revised calculations under the proposed “dual-requirement capital  structure with output floors” (i.e., a requirement that risk-based capital ratios be  calculated under both the “expanded risk-based approach” and the “standardized  approach” and the lower of the two be used for each risk-based capital ratio) will drive  (re)assessment and (re)alignment of existing stress testing frameworks with the need  for additional scenarios, including scenarios that consider the impact of rising rates on  asset values, deposit stability, liquidity, and earnings.
  • Capital Planning and Balance Sheet Management: Capital planning and balance  sheet management strategies will evolve based on the new approaches/requirements;  expect heightened data requirements, supervisory scrutiny of models, and more  granular reporting.
  • Accounting and tax: Changing capital plans, balance sheet management strategies,  and corresponding adjustments will potentially result in changes to accounting and tax  calculations (e.g., AOCI, DTA).

Risk management

In combination with economic uncertainties and interest rate pressures, changes to the capital requirements will focus supervisory attention to:

  • Impacts and Metrics: Evaluation of the impact changed capital requirements would have on  portfolios and products, as well as reassessment of risk management metrics and thresholds to  align with evolving capital requirements.
  • Unrealized Losses: Impact of potential new requirements to recognize unrealized losses on  available-for-sale securities in regulatory capital and related changes to capital and liquidity risk  management programs (see 04 Growth & Resiliency).
  • Credit Vulnerabilities: Increasing risks (e.g., repricing, default) amidst rising interest rates,  tightening of credit terms (e.g., loan size, maturities, collateralization, interest rate floors), and  weaknesses in select sectors (e.g., urban commercial real estate—offices, hotels); regulators  will look to stress testing and scenario analysis as ways to identify and measure the impact of  credit vulnerabilities (e.g., concentrations, highly leveraged borrowers, lower-rated borrowers).
  • Long-Term Debt: For large banks and BHCs (e.g., $100+ billion), plans to issue and maintain  minimum levels of eligible long-term debt sufficient to absorb losses or to provide capital in a  resolution (i.e., as required through an interagency rulemaking).

What to Watch

Regulatory attention, based on the proposed capital requirements, will focus on the impacts and implications to firms’ business processes, capital and risk calculations, and capital planning and investment strategies.

  • Capital Requirements: Proposed “Basel III Endgame”: Interagency (FRB, FDIC,  OCC) proposal to substantially change regulatory capital requirements impacting  large banks with $100+ billion in total assets; the changes would implement final  components of the Basel III agreement in the US as well as make changes to the US  “tailoring rules.”
  • Long-Term Debt Requirements: Interagency (FRB, FDIC, OCC) proposal to impose long-term debt requirements for certain large banks and holding companies with  assets of $100+ billion.

Call to Action…

  • Conduct current-state assessment: Evaluate the existing governance, data, data  quality, models, system infrastructure, internal controls, regulatory reporting, and capital  strategies to identify areas where remediation is needed considering the new capital  requirements. Assess changes to regulatory reporting and build needed capabilities to  include process, system, and technology changes. Start collecting data and perform pro  forma RWA impact analyses on banks’ portfolios. Identify potential data gaps to support  the proposed rules.
  • Establish centralized coordination: Implement a coordinated approach to drive the  various transition efforts across business lines and corporate functions, streamlining the  process and ensuring compliance with the proposed rules.
  • Optimize business and investment strategies: Banks should reconsider their strategies  to comply with the new capital requirements—particularly in light of the impacts to  various components including credit and operational risks (especially for larger, complex  institutions)—paying particular attention to risk-sensitive areas such as high-leverage/  private equity exposures, resecuritization, and large trading activities.
  • Prepare implementation and compliance timeline: Develop a comprehensive  multiyear, firmwide plan to achieve compliance with the proposed rules, considering  the transition period and the proposed compliance dates. Understand capacity planning  to execute changes, specifically for data, analytics and modeling teams, which will be  constrained as credit conditions continue to be volatile into 2024.

Dive into our thinking:

Ten Key Regulatory Challenges of 2024

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