Federal Deposit Insurance Corporation considers proposals to implement 2017 Basel risk-based capital standards for the largest banks and revise the standardized approach

The Federal Deposit Insurance Corporation published a statement by Chairman Travis Hill supporting two risk-based capital proposals being put to a Board vote, aimed at modernizing the capital framework for both the largest banking organizations and banks remaining on the standardized approach. One proposal would generally implement the 2017 Basel agreement through a more risk-sensitive “single stack” approach, and would generally be mandatory for the largest banks while optional for others. It includes revised treatments for mortgage and corporate lending, a standardized operational risk approach with modifications intended to avoid elements of the 2023 proposal viewed as overly punitive, and a market risk framework designed to encourage models-based approaches by recognizing diversification and hedging, with a three-year transition for a new model testing requirement. A second proposal would update the current standardized approach for banks not opting into the community bank leverage ratio and not covered by the Basel-based proposal, including moderately reduced risk weights for certain categories such as residential mortgages and consumer loans, mortgage risk weights based on loan-to-value and repayment source, removal of the deduction treatment for mortgage servicing assets, alignment in key areas such as derivatives and securitizations, and a pathway to recognize the risk-reducing benefits of certain risk transfer arrangements. Hill highlighted an interest in comments on whether operational risk should be determined through a simpler approach, and indicated he expected the agencies to move to a swift conclusion following a robust comment period.