On October 20, 2023, the US federal banking regulators announced that they were extending the period for public comment to January 16, 2024, for both (i) the Basel Endgame proposal to significantly revise the risk-based regulatory capital requirements for certain midsize and larger US banking organizations (the “Capital Proposal”) and (ii) the proposal to change the method for calculating the capital surcharge for global systemically important banking organizations (“G-SIBs”) (the “G-SIB Surcharge Proposal”).1 The original deadline for commenting on both proposals was November 30, 2023.
Concurrently, the Federal Reserve announced a request for data from banking organizations affected by the Capital Proposal and the G-SIB Surcharge Proposal.2 The instructions for the exercise indicate that the Federal Reserve is particularly concerned with understanding the impact of the proposals on the calculation of risk-weighted assets.
The data collection includes spreadsheets that banking organizations may use to submit information, although the Federal Reserve will accept data and comments in any format. The spreadsheets contain dozens of tables that effectively ask banking organizations to restate their entire financial position and recent income statement as if the proposals have been finalized.
The spreadsheets illustrate the herculean task that banking organizations would face if the Capital Proposal is finalized. The amount of information required to determine compliance with the capital requirements far exceeds that which is required under the current capital rules. In fact, we suspect that many larger regional banking organizations may not even have the relevant data or capabilities to respond to the Federal Reserve’s request that they project how the market risk and operational risk components of the Capital Proposal will affect them. Some banking organizations may find the effort needed to generate the requested data cannot be completed before January 16 or is cost prohibitive.
But even more notable is the fact that this data collection is being undertaken over two months after the proposals were released. Typically federal agencies collect and analyze information prior to releasing a proposal, in part to comply with the Administrative Procedure Act.3 While an agency may (and should) change a proposal based on public comment and further analysis, the changes should be a “logical outgrowth” of the proposed requirements. Waiting until after the release of the Capital Proposal to collect and analyze relevant data would seem more likely to lead to major changes or failure to consider important data.
Additionally, the extensions do not apply to the long-term debt proposal that was released in August.4 While the debt requirements are distinct from the capital requirements, the affected set of banking organizations is mostly the same, and most banking organizations manage debt and equity as part of integrated financial operations.
1 Press Release, Agencies extend comment period on proposed rules to strengthen large bank capital requirements (Oct. 20, 2023), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231020a.htm. See our earlier Legal Update on the proposals: https://www.mayerbrown.com/en/perspectives-events/publications/2023/07/overhaul-of-regulatory-capital-requirements-proposed-by-us-banking-regulators.
2 Press Release, Federal Reserve Board launches data collection to gather more information from the banks affected by the large bank capital proposal it announced earlier this year (Oct. 20, 2023), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231020b.htm.
3 E.g., Office of the Federal Register, A Guide to the Rulemaking Process (July 23, 2010) (“the agency discusses the merits of the proposed solution, cites important data and other information used to develop the action, and details its choices and reasoning” (emphasis added)).
4 See our earlier Legal Update at: https://www.mayerbrown.com/en/perspectives-events/publications/2023/08/long-term-debt-requirements-proposed-for-us-regional-banks.