US regulators have announced sweeping changes to capital requirements for banks with more than $100 billion in assets following upheavals at Silicon Valley Bank and elsewhere.

The proposed changes include:

• Ensuring consistency in the approach to calculating risk-based capital requirements for large banks.
• Incorporating unrealized losses or gains associated with available-for-sale securities in capital calculations and total loss-absorbing capacity.
• Adjusting the approach to the surcharge for Global Systemically Important Banks (G-SIBs) to make it more granular and sensitive.

There are separate proposals in the works relating to total loss-absorbing capacity requirements and stress testing.

The So What

Assuming the proposed changes are ratified, banks will have until July 2028 to comply. Nevertheless, they should begin preparing for the changes immediately, advises BCG Managing Director and Partner Bashir Todai.

“The proposed changes will have significant implications on the profitability of the US banking sector – especially for regional banks,” Todai says.

The measures signal a tougher regime ahead, according to Todai. This means:

• Many banks will have to increase their capital ratios. The Federal Reserve estimates that there will be a 16% increase in aggregate capital requirements across the banking system.
• In addition, recent commentary by the Fed suggests that banks will need to further increase their total loss-absorbing capacity, leading to increased funding costs.  
• New rules requiring recognition of unrealized losses of available-for-sale securities will temper risk-taking and dent returns in investment portfolios.
• Risk management capabilities will need to be upgraded, especially for regional banks, causing staffing levels and costs to rise.
• Banks will have to ensure their risk data is comprehensive and accurate. Small data issues threaten to meaningfully impact capital, given the greater reliance on standardized capital approaches.
• These forces will create material headwinds to profitability for many banks. Further consolidation among regional lenders seems likely. 

Now What

There is a comment period through November 30, 2023. If approved, the proposed changes will be phased in between July 2025 and July 2028.

However, supervisory and market expectations are already shifting. Banks can take the following steps to prepare for the changes:

• Banks that rapidly grew their business portfolios over the last few years during an era of easy deposits and cheap funding will have to consider retreating to a core of more profitable activities.
• Banks should enhance capabilities around risk data, stress testing, interest rate risk management, and regulatory affairs in anticipation of increased scrutiny.
• Banks need to examine a range of measures to improve productivity, including organizational efficiency, procurement and third-party spend. They should also work to boost revenue through pricing, customer acquisition, and retention.
• Banks should prime themselves for industry consolidation and evaluate potential targets against overall strategic objectives, as well as ensuring integration readiness.