Federal Reserve Vice Chairman Bowman: New banking capital rules will be announced next week aimed at encouraging increased lending.

The capital regulation framework of the US banking industry may undergo a new round of adjustments. Bauman, Vice Chair of the Federal Reserve responsible for banking supervision, said on Thursday that US regulatory agencies will announce new bank capital proposals in the coming week to further improve the capital regulatory system and encourage banks to expand lending activities. Speaking at an event at the Cato Institute in Washington, Bauman said that this reform aims to eliminate duplicate requirements in the capital regulation framework, make capital standards more closely aligned with actual risks, and fill longstanding regulatory gaps. Bauman stated: "These adjustments to the capital framework will eliminate overlapping requirements, make capital calibration more in line with actual risks, and comprehensively address the long-standing gaps in our prudential regulatory system." One of the goals of the new proposal is to encourage banks of different sizes to expand their lending by more reasonably aligning capital requirements with actual risks, thus enhancing banks' ability to provide credit. Bauman also stated that this policy may help reverse the trend of housing mortgage businesses gradually shifting from banks to non-bank institutions in recent years. This regulatory reform also involves the implementation of Basel III agreements. Bauman explained that the proposal will eliminate some "redundant methods" used by large banks in calculating capital requirements and increase sensitivity to credit risks, thus more accurately reflecting the risk level of lending businesses. Additionally, the new proposal will introduce a new "standardized approach." Under this framework, banks other than Global Systemically Important Banks (G-SIBs) will be able to simplify the risk capital assessment process by utilizing a unified calculation method, thereby reducing compliance complexity. Regarding the G-SIBs additional capital requirements, the new proposal will adjust parameters that measure the impact of large banks' activities on capital buffers and modify the calculation of additional capital related to short-term funding risks. Bauman mentioned that these adjustments will generally reduce capital requirements for some banks, with a significant portion of the adjustments coming from the reevaluation of economic growth factors and the correction of excessive capital requirements related to short-term wholesale funding. For a long time, Wall Street's large banks have been opposed to a regulatory proposal called "Basel III Endgame Rule" during the Biden administration. Banks believe that significantly increasing capital requirements could raise the cost of loans and weaken the ability of US banks to compete with international peers in global markets. Regulatory supporters argue that increasing capital levels is crucial to maintaining financial stability. Last year, the Federal Reserve proposed a revised version of the Basel III-related plan, which significantly reduced the magnitude of capital increases compared to the version that did not ultimately materialize in 2023. Some regulatory officials at the time estimated that this version could result in an overall increase in capital requirements for some large banks of about 3% to 7%. According to previous media reports, the upcoming new proposal is expected to roughly maintain this capital adjustment range. However, in conjunction with other regulatory requirements such as G-SIB surcharges and stress-testing mechanisms, some banks with large trading operations may actually see a decrease in their overall capital requirements. Bauman emphasized that the impact of capital on different banks will depend on their asset structures and business models, hence the final effects may vary greatly. "Developing these reforms is not easy, regulators have been trying to improve various components of the capital framework for years," she said. "The proposal to be announced next week will bring the US closer to fulfilling the commitments of the Basel III agreement of 2017, and is also the first step in a comprehensive review of the current capital regulatory framework."