US regulators unveil highly anticipated capital requirements with significant hikes proposed for largest banks

Proposal would bring the US in line with international Basel III ‘endgame’ rules, as regulators deliver details on new capital requirements which will hit the largest lenders in the market, with knock-on impacts expected across the markets.

US regulators have unveiled major new capital rules for lenders which is expected to see requirements for Global Systemically Important Banks (G-SIBs) increase by 19% and have a knock-on effect to trading and lending activities.

The rules will apply to lenders with $100 billion or more in assets and other organisations with “significant trading activity” as regulators continue on their mission of reducing systemic risk and enhancing resilience following the financial crisis of 2008.

Regulators will give banks until the beginning of 2028 to comply with the rules with a three-year transition period beginning 1 July 2025. The comment period for the proposal will conclude 30 November 2023.

“We are mindful of Basel III revisions but we also recognise that we will get a rule,” said Goldman Sachs chief financial officer, Denis Coleman in the bank’s Q2 earnings call. “There will be a comment period for the rule. There will be a period in which that’s implemented, some suggestions in the beginning of 2026. That implementation may even have a phase-in period. So as we think about the way in which we manage capital we think we should be optimising for our client franchise and for our shareholders.”

We obviously will make sure we’re in a position to adopt any new guidance and to do so on time and early — but in the intervening period, we’re going to continue to manage our capital to grow the firm and to deliver returns of capital to shareholders and we thought we would indicate that, that intention is to step it up from where we are.

Basel III standards were agreed following the 2008 crisis with capital, leverage and liquidity requirements rolled out in the ensuing years, however the latest reforms look to end the reliance on internal models in the US for estimating risk and introduce standardised frameworks.

The rules were anticipated by the market, but had also been questioned by various experts and organisations with many arguing the current format had seen banks ride out Covid-19, market volatility and annual stress tests.

In a recent interview with Bloomberg Television, Paco Ybarra, chief executive officer of Citi’s Institutional Clients Group, said the rules could impact the bank’s ability to trade certain products or offer prime brokerage services.

The rules were proposed by the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

Discussing the outlook for the second half of 2023 in its Q2 earnings report, Deutsche Bank said: “In the US and Europe, on the back of the recent strong improvements in bank performance due to the surge in interest rates, further upside may be more limited […] In the US most of the attention will be on the proposals from the US agencies to implement the Basel package in the US framework. It is expected that more banks will be brought within the scope of having to implement the Basel standards and capital requirements for US banks are expected to increase.”