Bank Capital Requirements: A Primer and Policy Issues
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Bank Capital Requirements: A Primer and
March 9, 2023
Policy Issues
Andrew P. Scott
Policy Issues
Updated July 13, 2026
(R47447)
Jump to Main Text of Report
Financial regulators at the state and federal levels take a number of measures to ensure the
Analyst in Financial
financial health of banks, generally through what is referred to as prudential (or safety and financial health of banks, generally through what is referred to as prudential (or safety and
Economics
soundness) regulation—rules and standards put in place to mitigate risks associated with banking soundness) regulation—rules and standards put in place to mitigate risks associated with banking
activity. One way activity. One way that regulators ensure that banks operate in a safe and sound manner is by regulators ensure that banks operate in a safe and sound manner is by
Marc Labonte
establishing capital requirements that banks must meet. Bank capital serves a number of establishing capital requirements that banks must meet. Bank capital serves a number of
Specialist in
important roles: Primarily it serves as a layer of protection against losses, and in doing so it important roles: Primarily it serves as a layer of protection against losses, and in doing so it
Macroeconomic Policy
promotes public confidence in banking institutions. Regulators do this in part because when promotes public confidence in banking institutions. Regulators do this in part because when
banks fail, the federal government provides a financial safety net to protect depositors and the banks fail, the federal government provides a financial safety net to protect depositors and the
broader economy from losses.broader economy from losses.
Capital requirements are statutorily mandated, but statute provides the regulators with discretion to set them as Capital requirements are statutorily mandated, but statute provides the regulators with discretion to set them as “"deem(ed) to deem(ed) to
be necessary and appropriatebe necessary and appropriate”"—although Congress has occasionally intervened legislatively to modify specific rules or —although Congress has occasionally intervened legislatively to modify specific rules or
details. Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation details. Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation
(FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are often modeled off international modeled off international
agreements made by the members of the Basel Committee on Banking Supervisionagreements made by the members of the Basel Committee on Banking Supervision (the most recent agreement being known as "Basel III"), which includes U.S. regulators., which includes U.S. regulators.
Many capital requirements are based on Many capital requirements are based on risk-weighted assets (RWA),, which base how much capital is required on the which base how much capital is required on the
riskiness of the bankriskiness of the bank’'s assets, whereas others, called leverage requirements, are generally based on total assets irrespective of s assets, whereas others, called leverage requirements, are generally based on total assets irrespective of
the riskiness of those assetsthe riskiness of those assets. The reason regulators use RWA in addition to total assets is because some assets are inherently The reason regulators use RWA in addition to total assets is because some assets are inherently
riskier than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of riskier than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of
capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example, banks held capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example, banks held
highly rated mortgage-backed securities (MBSs) before the 2008 financial crisis in part because those assets had a higher highly rated mortgage-backed securities (MBSs) before the 2008 financial crisis in part because those assets had a higher
expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the
crisis. Thus, leverage ratios, which are based on balance sheet size rather than risk, can be thought of as a backstop to ensure crisis. Thus, leverage ratios, which are based on balance sheet size rather than risk, can be thought of as a backstop to ensure
that incentives posed by risk-weighted capital ratios do not result in a bank holding insufficient capital. However, there are that incentives posed by risk-weighted capital ratios do not result in a bank holding insufficient capital. However, there are
policy tradeoffs in using these two types of requirements. policy tradeoffs in using these two types of requirements.Risk-weighted assetsRWAs are more complex and therefore impose are more complex and therefore impose
greater regulatory burden. For that reason, Congress created an option for qualifying smaller banks to opt out of risk-greater regulatory burden. For that reason, Congress created an option for qualifying smaller banks to opt out of risk-
weighted requirements in 2018 when it created a simplified regime called the community bank leverage ratioweighted requirements in 2018 when it created a simplified regime called the community bank leverage ratio (CBLR). Another issue . Another issue
of increasing frequency is that leverage requirements are requiring banks to hold more capital than risk-weighted of increasing frequency is that leverage requirements are requiring banks to hold more capital than risk-weighted
requirements. This has the disadvantage, some argue, of making capital regulation no longer based on the principle of requirements. This has the disadvantage, some argue, of making capital regulation no longer based on the principle of
matching risk with capital.matching risk with capital.
Congress may be interested in a number of additional policy issues concerning capital regulation. The first is the overall level
of capital requirements: Are they sufficient, too high, or too low? Have COVID-19 pandemic-related circumstances
adequately vetted the efficacy of current capital frameworks? If levels are too high, what is the most effective constraint to
lower them? Should various capital requirements be recalibrated to better align incentives with public policy goals? In
addition, large banks are subject to more complex and higher capital requirements, rising in stringency with the size and
complexity of the bank. Have those requirements sufficiently addressed the too big to fail problem? Alternatively, could
those requirements be better calibrated to increase efficiency while still mitigating systemic risk? Will various proposals,
including the Basel III “endgame,” improve large bank capital requirements?
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Contents
Introduction ..................................................................................................................................... 1
How Capital Regulation Works ................................................................................................. 1
Why Have Capital Requirements? ............................................................................................ 2
Current U.S. Bank Capital Framework ........................................................................................... 2
Regulatory Definitions of Capital ............................................................................................. 3
Risk-Weighted Assets ................................................................................................................ 4
Minimum Capital Requirements ............................................................................................... 5
Prompt Corrective Action ................................................................................................... 6
Risk-Weighted Capital Requirements ....................................................................................... 7
Leverage Ratios ......................................................................................................................... 8
Community Bank Leverage Ratio (CBLR) ........................................................................ 9
Large Bank Enhanced Capital Framework ............................................................................. 10
Advanced Approaches ....................................................................................................... 11
Supplementary Leverage Ratio ......................................................................................... 12
G-SIB Capital Surcharges ................................................................................................. 13
Stress Tests, Capital Planning, and the Stress Capital Buffer ........................................... 13
Countercyclical Capital Buffer (CCYB) ........................................................................... 16
Total Loss Absorbing Capacity ......................................................................................... 17
Dodd-Frank Emergency Requirements ............................................................................. 17
Summary of Large Bank Capital Requirements ............................................................... 18
Summary of Risk-Weighted and Leverage Capital Requirements .......................................... 18
Policy Issues .................................................................................................................................. 20
Should Capital Levels Be Higher or Lower? .......................................................................... 20
Binding Requirements ............................................................................................................. 21
Large Bank Issues ................................................................................................................... 23
Should the Countercyclical Buffer Be Reformed?............................................................ 23
TLAC and Regional Banks ............................................................................................... 24
SLR Relief for Safe Assets ............................................................................................... 25
Modifying the Enhanced SLR for G-SIBs ........................................................................ 26
Current Expected Credit Loss Phase-In .................................................................................. 27
Crypto and Capital Requirements ........................................................................................... 28
Basel III “Endgame” ............................................................................................................... 29
Figures
Figure 1. Risk-Weighted Capital Requirements for Large Banks ................................................. 16
Figure 2. Adequate Risk-Weighted Prompt Corrective Action Requirements and Buffers ........... 19
Figure 3. Prompt Corrective Action Leverage Requirements ....................................................... 19
Figure 4. Enhanced SLR Requirement for G-SIBs, Current and Under Proposed Rule ............... 27
Tables
Table 1. Regulatory Capital Components ........................................................................................ 3
Table 2. Select Risk Weights for FDIC-Supervised Banks ............................................................. 4
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Table 3. Minimum Capital Requirements ........................................................................................ 5
Table 4. Prompt Corrective Action Framework ............................................................................... 6
Table 5. CBLR Framework ............................................................................................................. 9
Table 6. Banks Subject to EPR ....................................................................................................... 11
Table 7. EPR Capital-Related Requirements ................................................................................. 18
Table A-1. Key Provisions of U.S. Basel III Implementation ....................................................... 36
Appendixes
Appendix. Historical Capital Frameworks .................................................................................... 31
Contacts
Author Information ........................................................................................................................ 37
Congressional Research Service
Bank Capital Requirements: A Primer and Policy Issues
Introduction
Banks then use those deposits Banks then use those depositsandto lend lend them out to other out to other peopleconsumers and businesses. This is called. This is called credit
intermediation, and it is an important facet of economic activity. Intermediation is also inherently , and it is an important facet of economic activity. Intermediation is also inherently
risky: Sometimes borrowers default on loans. Because banks lend out a portion of the deposits risky: Sometimes borrowers default on loans. Because banks lend out a portion of the deposits
they receive, if their losses were great enough on defaulted loans, banks would be unable to honor they receive, if their losses were great enough on defaulted loans, banks would be unable to honor
deposits. Financial regulators at the state and federal levels take a number of measures designed deposits. Financial regulators at the state and federal levels take a number of measures designed
to ensure the financial health of banks, generally through what is referred to as prudential (or to ensure the financial health of banks, generally through what is referred to as prudential (or
safety and soundness) regulation—rules and standards put in place that mitigate risks associated safety and soundness) regulation—rules and standards put in place that mitigate risks associated
with banking activity. In addition, regulators conduct routine examination of bankswith banking activity. In addition, regulators conduct routine examination of banks’' books to books to
ensure that bank operations meet prudential standards. When banks fail to follow those rules, ensure that bank operations meet prudential standards. When banks fail to follow those rules,
regulators have enforcement powers to compel them to correct deficiencies.regulators have enforcement powers to compel them to correct deficiencies.
Capital requirements are a key prudential measure that banks must meet in order to operate in a Capital requirements are a key prudential measure that banks must meet in order to operate in a
safe and sound manner. Capital serves as a layer of protection against losses. In doing so it safe and sound manner. Capital serves as a layer of protection against losses. In doing so it
promotes public confidence in banking institutions. Capital standards serve to provide a buffer promotes public confidence in banking institutions. Capital standards serve to provide a buffer
between losses and systemic risk, but they also constrain a bankbetween losses and systemic risk, but they also constrain a bank’'s potential for lending and other s potential for lending and other
asset growth. Because of this trade-off between safety and performance, Congress has perennially asset growth. Because of this trade-off between safety and performance, Congress has perennially
debated the balance between prudential standards and regulatory burden. Frequently, that debate debated the balance between prudential standards and regulatory burden. Frequently, that debate
focuses on proposals to modify capital requirements.focuses on proposals to modify capital requirements.
How Capital Regulation Works
A core practice of banks is to make loans, which are assets on the bankA core practice of banks is to make loans, which are assets on the bank’'s balance sheet. Banks s balance sheet. Banks
also acquire other assets such as securities and property. Banks primarily raise the funds needed also acquire other assets such as securities and property. Banks primarily raise the funds needed
to make loans by attracting deposits, a type of liability. Banks can also borrow money from to make loans by attracting deposits, a type of liability. Banks can also borrow money from
creditors (e.g., by issuing debt), which is another type of liability. However, banks must hold creditors (e.g., by issuing debt), which is another type of liability. However, banks must hold
more assets than liabilities in order to remain solvent, so they also raise funds from another more assets than liabilities in order to remain solvent, so they also raise funds from another
source, referred to as capital. Conceptually, a banksource, referred to as capital. Conceptually, a bank’'s capital is the stock or equity that represents s capital is the stock or equity that represents
the ownersthe owners’' stake in the bank. stake in the bank.11 (As discussed below, the regulatory definition of (As discussed below, the regulatory definition of capital is more is more
complex and includes various other instruments, but owner equity is the primary type of complex and includes various other instruments, but owner equity is the primary type of
regulatory capital.) The value of a bankregulatory capital.) The value of a bank’'s capital is the difference between the value of its assets s capital is the difference between the value of its assets
and the value of its liabilities. By setting capital requirements, regulators compel banks to acquire and the value of its liabilities. By setting capital requirements, regulators compel banks to acquire
at least a certain amount of funding from this source.at least a certain amount of funding from this source.
Capital helps a bank avoid insolvency and failure. When banks make loans, sometimes borrowers Capital helps a bank avoid insolvency and failure. When banks make loans, sometimes borrowers
do not pay their loans back, and the value of the loan to the bank falls. On the bankdo not pay their loans back, and the value of the loan to the bank falls. On the bank’'s balance s balance
sheet, as these loans default, the value of the banksheet, as these loans default, the value of the bank’'s assets fall to reflect the new value of the s assets fall to reflect the new value of the
loans. The bank can remain solvent because the initial losses are balanced by reducing the bankloans. The bank can remain solvent because the initial losses are balanced by reducing the bank’s
's capital value. For example, if a bankcapital value. For example, if a bank’'s owners have retained earnings from the prior year, they s owners have retained earnings from the prior year, they
can use those past earnings to pay off debts when the proceeds from their assets are insufficient. can use those past earnings to pay off debts when the proceeds from their assets are insufficient.
From a cash flow perspective, if a bank becomes unable to both pay all of its creditors and make From a cash flow perspective, if a bank becomes unable to both pay all of its creditors and make
dividend payments to stockholders, debts are repaid first (generally, creditors are legally required dividend payments to stockholders, debts are repaid first (generally, creditors are legally required
to be repaid before stockholders collect dividendsto be repaid before stockholders collect dividends, and dividend payments are not mandatory), increasing the possibility of the bank ), increasing the possibility of the bank
remaining solvent. In this manner, capital acts as a buffer for losses.remaining solvent. In this manner, capital acts as a buffer for losses.
1 Equity may be publicly traded in the case of a publicly listed bank or held by owners in an illiquid form for privately
held banks.
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Why Have Capital Requirements?
Why Have Capital Requirements? Regulators require banks to hold capital to reduce the likelihood of bank failures, which can Regulators require banks to hold capital to reduce the likelihood of bank failures, which can
negatively affect the local and broader economy, and to avoid widespread bank failures because negatively affect the local and broader economy, and to avoid widespread bank failures because
of the systemic risk that they pose to financial stability, as occurred during the Great Depression. of the systemic risk that they pose to financial stability, as occurred during the Great Depression.
To avoid those outcomes, the federal government provides a financial safety net to protect insured To avoid those outcomes, the federal government provides a financial safety net to protect insured
depositors and the broader economy from bank failures. The government safety net comes in two depositors and the broader economy from bank failures. The government safety net comes in two
separate forms: Deposit insurance is provided by the Federal Deposit Insurance Corporation separate forms: Deposit insurance is provided by the Federal Deposit Insurance Corporation
(FDIC) to protect depositors from any loss (up to the insurance limit) in the event of a bank (FDIC) to protect depositors from any loss (up to the insurance limit) in the event of a bank
failure, and the Federal Reserve (Fed) acts as a lender of last resort, extending short-term credit to failure, and the Federal Reserve (Fed) acts as a lender of last resort, extending short-term credit to
banks that are unable to access funding in private markets. These measures aim to ensure that banks that are unable to access funding in private markets. These measures aim to ensure that
banks remain liquid during periods of economic stress and reduce the likelihood that a liquidity banks remain liquid during periods of economic stress and reduce the likelihood that a liquidity
crisis becomes a solvency problem. crisis becomes a solvency problem.TheIn addition, the government, FDIC, and Fed have also provided banks government, FDIC, and Fed have also provided banks
with ad hoc, emergency assistance in past crises, such as the 2008 financial crisis.with ad hoc, emergency assistance in past crises, such as the 2008 financial crisis.
Capital is the buffer for the bank that protects the financial safety net from losses. It absorbs Capital is the buffer for the bank that protects the financial safety net from losses. It absorbs
losses, providing a layer of protection before a potential public intervention may occur. Capital losses, providing a layer of protection before a potential public intervention may occur. Capital
allows an institution to continue operating through periods of foreseeable losses without reaching allows an institution to continue operating through periods of foreseeable losses without reaching
insolvency, ensuring that the initial risk of loss is borne by owners rather than the public safety insolvency, ensuring that the initial risk of loss is borne by owners rather than the public safety
net. Thus, capital requirements contribute to the safety of the banking system, with significant net. Thus, capital requirements contribute to the safety of the banking system, with significant
consequences for taxpayers, the broader financial system, and the economy.consequences for taxpayers, the broader financial system, and the economy.
Current U.S. Bank Capital Framework
Capital requirements are statutorily mandated, and statute provides the regulators with discretion Capital requirements are statutorily mandated, and statute provides the regulators with discretion
to set them as to set them as“"deem(ed) to be necessary and appropriatedeem(ed) to be necessary and appropriate”"—although Congress has occasionally —although Congress has occasionally
intervened legislatively to modify specific rules or details.intervened legislatively to modify specific rules or details.22 Capital rules are set through Capital rules are set through
regulation by the federal bank regulators—the FDIC, the Fed, and the Office of the Comptroller regulation by the federal bank regulators—the FDIC, the Fed, and the Office of the Comptroller
of the Currency (OCC). The OCC is the primary federal regulator for nationally chartered banks, of the Currency (OCC). The OCC is the primary federal regulator for nationally chartered banks,
the Fed for state-chartered banks that become members of the Federal Reserve System, and the the Fed for state-chartered banks that become members of the Federal Reserve System, and the
FDIC for the remaining state-chartered banks.FDIC for the remaining state-chartered banks.33 Generally, the capital framework these regulators Generally, the capital framework these regulators
establish is consistent among establish is consistent amongregulators4regulators4 and aligns with the recommendations of an international and aligns with the recommendations of an international
standard-setting body called the Basel Committee on Banking Supervision (BCBS), although standard-setting body called the Basel Committee on Banking Supervision (BCBS), although
details sometimes diverge between domestic regulation and Basel agreements.details sometimes diverge between domestic regulation and Basel agreements.55
Capital requirements were updated significantly following the Basel II and Basel III agreements, Capital requirements were updated significantly following the Basel II and Basel III agreements,
the latter of which was intended to address weaknesses in capital rules that were exposed by the the latter of which was intended to address weaknesses in capital rules that were exposed by the
2007-2009 financial crisis. (2007-2009 financial crisis. (See the Appendix for more information on historical capital frameworks for more information on historical capital frameworks
in the United States.)
2 12 U.S.C. §3907. For examples of legislative interventions, see Appendix.
3 The term bank is used generally in this report to refer to an institution that is subject to capital requirements and has
one of the federal bank regulators as its primary regulator. There are also more exotic types of bank charters that the
three regulators have respective jurisdiction over that are ignored here for simplicity. For more on who regulates which
type of bank, see CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory
Framework, by Marc Labonte.
4 Differences in capital standards among regulators are minimal. For details, see OCC, Federal Reserve System, and
FDIC, Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies as of
September 30, 2022, 88 Federal Register 5960, January 30, 2023, https://www.govinfo.gov/content/pkg/FR-2023-01-
30/pdf/2023-01697.pdf.
5 The BCBS is described in greater detail in Appendix.
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in the United States.)
Generally, banks are required to meet a range of basic capital requirements to ensure that when Generally, banks are required to meet a range of basic capital requirements to ensure that when
they take losses, they have an adequate buffer against insolvency. In addition, larger banks are they take losses, they have an adequate buffer against insolvency. In addition, larger banks are
required to meet enhanced prudential standards that include higher capital ratios to mitigate required to meet enhanced prudential standards that include higher capital ratios to mitigate
systemic risk. As discussed in more detail below, capital requirements are expressed as ratios systemic risk. As discussed in more detail below, capital requirements are expressed as ratios
where the numerator is capital and the denominator is assets. There are two broad categories of where the numerator is capital and the denominator is assets. There are two broad categories of
requirements—risk-weighted requirements, where the size of the denominator is based on the requirements—risk-weighted requirements, where the size of the denominator is based on the
riskiness of a bankriskiness of a bank’'s assets, and leverage requirements, where all assets are treated equally in the s assets, and leverage requirements, where all assets are treated equally in the
denominator.denominator.
The following sections summarize the different types of capital requirements established by The following sections summarize the different types of capital requirements established by
federal banking regulators. The next section provides details on the basic capital standards that all federal banking regulators. The next section provides details on the basic capital standards that all
banks are required to meet—first, how the numerator (capital) is defined; next, how the banks are required to meet—first, how the numerator (capital) is defined; next, how the
denominator (assets) is calculated; and, finally, an overview of the various numerical ratios that denominator (assets) is calculated; and, finally, an overview of the various numerical ratios that
banks must meet. Then the subsequent section discusses the additional standards that larger banks must meet. Then the subsequent section discusses the additional standards that larger
institutions must meet.institutions must meet.
Regulatory Definitions of Capital
There are three core capital components that make up banksThere are three core capital components that make up banks’' total capital, as described total capital, as described inin Table
1. Banks use each component to meet various regulatory capital requirements. Each component Banks use each component to meet various regulatory capital requirements. Each component
as listed below is progressively less able to absorb losses.as listed below is progressively less able to absorb losses.
Table 1. Regulatory Capital Components
Capital Component
Summary of Capital Elements
Common equity tier 1 capital
Sum of common stock issued by the bank; retained Sum of common stock issued by the bank; retained
earnings; accumulated other comprehensive income; earnings; accumulated other comprehensive income;
common equity tierCommon Equity Tier 1 minority interest; common stock 1 minority interest; common stock
issued and held in trust for the benefit of employees as issued and held in trust for the benefit of employees as
part of an employee stock ownershippart of an employee stock ownership
Additional Additional tierTier 1 capital 1 capital
Unsecured and paid-in capital instruments issued with Unsecured and paid-in capital instruments issued with
no maturity or planned incentives to redeem, which are no maturity or planned incentives to redeem, which are
subordinated to depositorssubordinated to depositors
Tier 2 capital
Unsecured and paid-in capital instruments subordinated Unsecured and paid-in capital instruments subordinated
to depositors with a minimum maturity of five yearsto depositors with a minimum maturity of five years
Source: 12 C.F.R. Chapter III, Subchapter B, 12 C.F.R. Chapter III, Subchapter B,Part §324.20.324.20.
Tier 1 capital has two main components: Tier 1 capital has two main components: common equity tierCommon Equity Tier 1 (CET1) and additional 1 (CET1) and additional tierTier 1 1
capital:capital:
1. 1. CET1 represents the core equity of a bank, comprising retained earnings and CET1 represents the core equity of a bank, comprising retained earnings and
common stock. CET1 is the highest quality of capital and serves to absorb initial common stock. CET1 is the highest quality of capital and serves to absorb initial
losses, because a bank faces no obligation to repay it and can write down its losses, because a bank faces no obligation to repay it and can write down its
value in the event of losses. The FDICvalue in the event of losses. The FDIC’'s Risk Management of Examination s Risk Management of Examination
Policies defines CET1 as Policies defines CET1 as“"qualifying common stock and related surplus net of qualifying common stock and related surplus net of
treasury stock; retained earnings; certain accumulated other comprehensive treasury stock; retained earnings; certain accumulated other comprehensive
income (AOCI) elements ifincome (AOCI) elements if the institution institution management does not make an AOCI opt-out does not make an AOCI opt-out
electionelection, plus or minus regulatory deductions or adjustments as appropriate; and plus or minus regulatory deductions or adjustments as appropriate; and
qualifying common equity tier 1 minority interests.qualifying common equity tier 1 minority interests.”" According to the FDIC, the According to the FDIC, the
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federal banking agencies expect the majority of CET1 capital to be in the form of federal banking agencies expect the majority of CET1 capital to be in the form of
common voting shares.common voting shares.6 2.6
2. Additional Additional tierTier 1 capital includes qualifying noncumulative perpetual preferred 1 capital includes qualifying noncumulative perpetual preferred
stock, bank-issued instruments from federal programs such as the Small Business stock, bank-issued instruments from federal programs such as the Small Business
Lending Fund or Troubled Asset Relief Program that previously qualified for Lending Fund or Troubled Asset Relief Program that previously qualified fortier
Tier 1 capital, and qualifying 1 capital, and qualifyingtierTier 1 minority interests—that is, less certain 1 minority interests—that is, less certain
investments in other unconsolidated financial institutionsinvestments in other unconsolidated financial institutions’' instruments that would instruments that would
otherwise qualify as additional otherwise qualify as additionaltierTier 1 capital. 1 capital.7
7Tier 2 capital includes the allowance for loan and lease losses up to 1.25% of risk-weighted Tier 2 capital includes the allowance for loan and lease losses up to 1.25% of risk-weighted
assetsassets (RWAs), qualifying preferred stock, subordinated debt, and qualifying , qualifying preferred stock, subordinated debt, and qualifyingtierTier 2 minority interests, less 2 minority interests, less
any deductions in the any deductions in thetierTier 2 instruments of an unconsolidated financial institution. 2 instruments of an unconsolidated financial institution.
Risk-Weighted Assets
(RWAs) As discussed below, banking regulators establish a number of capital ratios that determine how As discussed below, banking regulators establish a number of capital ratios that determine how
much capital an institution must hold to remain adequately capitalized. Many capital ratios are much capital an institution must hold to remain adequately capitalized. Many capital ratios are
calculated as a percentage of total calculated as a percentage of totalrisk-weighted assets (RWA)RWA. The reason regulators use RWA . The reason regulators use RWA
instead of just assets is because some assets are inherently riskier than others. For example, if a instead of just assets is because some assets are inherently riskier than others. For example, if a
bank holds bank holdsTreasuryDepartment of the Treasury (Treasury) bonds, that is a relatively low-risk asset, exposing the bank to limited bonds, that is a relatively low-risk asset, exposing the bank to limited
potential losses. However, if a bank holds a loan portfolio of subprime mortgages, that is potential losses. However, if a bank holds a loan portfolio of subprime mortgages, that is
relatively higher risk. To account for these differences in risk profiles, regulators require banks to relatively higher risk. To account for these differences in risk profiles, regulators require banks to
hold more capital against assets with greater relative risk. Assets are grouped into risk categories hold more capital against assets with greater relative risk. Assets are grouped into risk categories
and assigned a risk weight, which determines how much capital a bank must hold against and assigned a risk weight, which determines how much capital a bank must hold against
exposure. Risk weights (e.g., 20%) are not the amount of capital required. Rather, they are the exposure. Risk weights (e.g., 20%) are not the amount of capital required. Rather, they are the
percentage of percentage oftotal assets the assets within that category that counts toward the denominator of the capital ratio. In other words, that counts toward the denominator of the capital ratio. In other words,
if a bank faces a capital requirement of 6% and holds $100 of assets with a risk weight of 20%, if a bank faces a capital requirement of 6% and holds $100 of assets with a risk weight of 20%,
the bank must hold $1.20 (6% x 20% x $100) of capital for those assets.the bank must hold $1.20 (6% x 20% x $100) of capital for those assets.
Some examples of risk weights are provided below inSome examples of risk weights are provided below in Table 2.
Table 2. Select Risk Weights for FDIC-Supervised Banks
Risk Weight
Examples of Assets
0%
Investments in U.S. government (e.g., Treasury bonds) and exposures that Investments in U.S. government (e.g., Treasury bonds) and exposures that
are unconditionally guaranteed by the U.S. governmentare unconditionally guaranteed by the U.S. government
20%
Exposure to U.S. government that is conditionally guaranteed by the U.S. Exposure to U.S. government that is conditionally guaranteed by the U.S.
government; to the GSEs (e.g., Fannie Mae and Freddie Mac) that is not government; to the GSEs (e.g., Fannie Mae and Freddie Mac) that is not
equity exposure or preferred stock; to U.S. depository institutionsequity exposure or preferred stock; to U.S. depository institutions
50%
Most first-lien residential mortgages, pre-sold construction loans that are Most first-lien residential mortgages, pre-sold construction loans that are
not cancellednot cancelled
100%
GSE preferred stock; most corporate exposures, junior-lien residential GSE preferred stock; most corporate exposures, junior-lien residential
mortgages
150%
mortgages
Exposures to a sovereign where a sovereign default has occurred in the Exposures to a sovereign where a sovereign default has occurred in the
previous five years, loans that are more than 90 days past due that are not previous five years, loans that are more than 90 days past due that are not
guaranteed or are unsecured
6 FDIC, Risk Management Manual of Examination Policies: Capital, August 2022, p. 3, https://www.fdic.gov/
regulations/safety/manual/section2-1.pdf.
7 For background, see CRS Report R41427, Troubled Asset Relief Program (TARP): Implementation and Status, by
Baird Webel; and CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.
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guaranteed or are unsecured Source: 12 C.F.R. §324.32.12 C.F.R. §324.32.
Notes: This is not an exhaustive list and is used simply to This is not an exhaustive list and is used simply toil ustrateillustrate how certain asset categories are treated how certain asset categories are treated
differently with respect to capital requirements.differently with respect to capital requirements.
Federal regulations prescribe two approaches to risk-weighting assets. Most banks are subject to Federal regulations prescribe two approaches to risk-weighting assets. Most banks are subject to
the the standardized approach. The . The advanced approach is required for only the nine largest, most is required for only the nine largest, most
complex institutions, although other banks may voluntarily adopt it. The standardized approach is complex institutions, although other banks may voluntarily adopt it. The standardized approach is
a simpler calculation that banks can use to account for their exposures to risk, while the advanced a simpler calculation that banks can use to account for their exposures to risk, while the advanced
approach is more complex, using enhanced methodologies for calculating risk exposures. For approach is more complex, using enhanced methodologies for calculating risk exposures. For
more information, see the more information, see the“Advanced Approaches” section below.
section below entitled "Advanced Approaches." Minimum Capital Requirements
There are several capital requirements, which will be explained in greater detail below, that banks There are several capital requirements, which will be explained in greater detail below, that banks
must comply with. Banks meet these various requirements simultaneously, as opposed to must comply with. Banks meet these various requirements simultaneously, as opposed to
additively, with the exception of buffers, which are on top of the minimum requirements. In other additively, with the exception of buffers, which are on top of the minimum requirements. In other
words, banks do not need to hold separate amounts of capital to comply with multiple words, banks do not need to hold separate amounts of capital to comply with multiple
requirementsrequirements. Table 3 explains how these requirements are calculated. A series of requirements, explains how these requirements are calculated. A series of requirements,
which are referred to as the which are referred to as the“"generally applicable framework,generally applicable framework,”" are the default set of requirements are the default set of requirements
that a bank would need to comply with. However, some qualifying banks have opted out of the that a bank would need to comply with. However, some qualifying banks have opted out of the
generally applicable framework and instead comply with the community bank leverage ratiogenerally applicable framework and instead comply with the community bank leverage ratio.8 (CBLR).8 In In
addition, large banks are subject to a series of requirements in addition to the generally applicable addition, large banks are subject to a series of requirements in addition to the generally applicable
framework.framework.9
9 Table 3. Minimum Capital Requirements
Capital Ratio
Calculation
Generally Applicable Framework
Common Equity Tier 1 (CET1) CapitalCommon Equity Tier 1 (CET1) Capital
CET1/RWACET1/RWA
Tier 1 CapitalTier 1 Capital
Tier 1/RWATier 1/RWA
Total CapitalTotal Capital
Total Capital/RWATotal Capital/RWA
Capital Conservation Buffer*
CET1/RWA
Leverage
Tier 1 Capital/Total Consolidated Assets (less certain Tier 1 Capital/Total Consolidated Assets (less certain
deductions)deductions)
Other Measures
Supplementary Leverage (Large Banks)Supplementary Leverage (Large Banks)
Tier 1 Capital/Total Leverage ExposureTier 1 Capital/Total Leverage Exposure
Tangible Capital (Federal Savings Associations)Tangible Capital (Federal Savings Associations)
Tier 1 Capital/Average Total AssetsTier 1 Capital/Average Total Assets
Community Bank LeverageCommunity Bank Leverage
Tier 1 Capital/Average Total Consolidated AssetsTier 1 Capital/Average Total Consolidated Assets
Sources: 12 C.F.R. §3.10-11; 12 C.F.R. §217.10-11; 12 C.F.R. Chapter III, Subchapter B, Part 324.12 C.F.R. §3.10-11; 12 C.F.R. §217.10-11; 12 C.F.R. Chapter III, Subchapter B, Part 324.
Notes: The calculation of The calculation ofRWArisk-weighted assets (RWAs) varies for the standard approach and advanced approach, although the varies for the standard approach and advanced approach, although the
numerical requirement is the same for both methods. See text for definitions and which banks each requirement numerical requirement is the same for both methods. See text for definitions and which banks each requirement
applies to.
8 See the section below entitled “Community Bank Leverage Ratio (CBLR).”
9 See the section below entitled “Large Bank Enhanced Capital Framework.”
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applies to.
* The capital conservation buffer is defined differently for large banks. Depending on the bank, it may include the * The capital conservation buffer is defined differently for large banks. Depending on the bank, it may include the
stress capital buffer, the countercyclical capital buffer, the stress capital buffer, the countercyclical capital buffer, the Global Systemically Important Bank (G-SIB)G-SIB surcharge, or some combination of these surcharge, or some combination of these
measures.measures.
A 1983 federal appeals court ruling called into question the authority of bank regulators to A 1983 federal appeals court ruling called into question the authority of bank regulators to
enforce capital rules on banks. The ruling argued that capital weakness alone, as measured by enforce capital rules on banks. The ruling argued that capital weakness alone, as measured by
capital ratios, was not a sufficient justification to impose a cease-and-desist order on a bank.capital ratios, was not a sufficient justification to impose a cease-and-desist order on a bank.1010 In In
November 1983, Congress responded to this court ruling by granting clear authority over bank November 1983, Congress responded to this court ruling by granting clear authority over bank
capital levels to the federal banking supervisors in the International Lending Supervision Act of capital levels to the federal banking supervisors in the International Lending Supervision Act of
1983 (12 U.S.C. §3901).1983 (12 U.S.C. §3901).
Through their supervisory, enforcement, and resolution powers, bank regulators can compel Through their supervisory, enforcement, and resolution powers, bank regulators can compel
banks to take actions to improve their safety and soundness. Capital requirements trigger the banks to take actions to improve their safety and soundness. Capital requirements trigger the
consistent application of remedial actions through the prompt corrective action consistent application of remedial actions through the prompt corrective action (PCA) framework.framework.
Prompt Corrective Action
(PCA)
The Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242) built on this The Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242) built on this
authority to establish criteria for which regulators would take certain remedial actions based on authority to establish criteria for which regulators would take certain remedial actions based on
the capital positions of each institution. This rules-based enforcement scheme is referred to as the capital positions of each institution. This rules-based enforcement scheme is referred to as
prompt corrective action (PCA)PCA. The philosophy behind PCA is to limit taxpayer losses by . The philosophy behind PCA is to limit taxpayer losses by
intervening swiftly when a bank becomes undercapitalized and before it loses more money. The intervening swiftly when a bank becomes undercapitalized and before it loses more money. The
general PCA framework is summarized ingeneral PCA framework is summarized in Table 4. The minimum requirements are set equal to The minimum requirements are set equal to
the adequately capitalized PCA requirements.the adequately capitalized PCA requirements.
Table 4. Prompt Corrective Action (PCA) Framework
General Regulations for Commercial BanksGeneral Regulations for Commercial Banks
Total Risk-Based
Capital Ratio Tier 1 Risk-Based
Capital Ratio Common Equity
Capital Ratio
Capital Ratio
Tier 1 Capital
Ratio
PCA Category
Ratio
Leverage Ratio
Well CapitalizedWell Capitalized
≥ 10.0% and≥ 10.0% and
≥ 8.0% and≥ 8.0% and
≥ 6.5% and≥ 6.5% and
≥ 5.0%.≥ 5.0%.
Adequately Adequately
Capitalized
≥ 8.0% and≥ 8.0% and
≥ 6.0% and≥ 6.0% and
≥4.5% and≥4.5% and
≥ 4.0%≥ 4.0%
Capitalized
Undercapitalized
< 8.0% or
< 6.0% or
< 4.5% or
<4.0%.
Significantly
< 6.0% or
< 4.0% or
< 3.0% or
< 3.0%.
Undercapitalized
Critically
n/a
n/a
n/a
Ratio of tangible Ratio of tangible
Undercapitalized
equity to total equity to total
assets ≤ 2.0%.*assets ≤ 2.0%.*
Source: 12 C.F.R. 12 C.F.R. §Part 324,324, FDIC, FDIC, Formal and Informal Enforcement Actions Manual, , “"Chapter 5—Enforcement Chapter 5—Enforcement
Actions: Prompt Corrective Action,Actions: Prompt Corrective Action,”" p. 4, https://www.fdic.gov/regulations/examinations/enforcement-actions/ p. 4, https://www.fdic.gov/regulations/examinations/enforcement-actions/
ch-05.pdfch-05.pdf.
. Notes: CBLR institutions that meet a leverage ratio greater than CBLR institutions that meet a leverage ratio greater than98% are considered well capitalized; see % are considered well capitalized; see
“"Community Bank Leverage Ratio (CBLR)Community Bank Leverage Ratio (CBLR)”" section of report. In addition to the capital requirements listed in the section of report. In addition to the capital requirements listed in the
table, certain actions issued by the FDIC would prevent a bank from being considered well capitalized. A bank table, certain actions issued by the FDIC would prevent a bank from being considered well capitalized. A bank
subsidiary of a Global Systemically Important Bank (G-SIB) is deemed well capitalized if it meets the above subsidiary of a Global Systemically Important Bank (G-SIB) is deemed well capitalized if it meets the above
criteria and has a supplementary leverage ratio criteria and has a supplementary leverage ratio≥ 6.0% (that is more than 3.0% and no more than 4.0% (the value will depend on each G-SIB's surcharge—see the section below entitled see the section below entitled "“Supplementary Leverage
Ratio”)Ratio"). Category I, II, and III banks and any other that elects to use advanced approaches must also meet a . Category I, II, and III banks and any other that elects to use advanced approaches must also meet a
10 First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674 (5th Cir. 1983).
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supplementary leverage ratio ≥ 3.0% to be considered adequately capitalized and is deemed undercapitalized if it supplementary leverage ratio ≥ 3.0% to be considered adequately capitalized and is deemed undercapitalized if it
has a supplementary leverage ratio < 3.0%.has a supplementary leverage ratio < 3.0%.
* Tangible equity is * Tangible equity istierTier 1 capital plus the amount of outstanding perpetual preferred stock (including related 1 capital plus the amount of outstanding perpetual preferred stock (including related
surplus) not included in surplus) not included intierTier 1 capital. 1 capital.
Increasingly stringent restrictions are placed on a bank that is less than adequately capitalized in Increasingly stringent restrictions are placed on a bank that is less than adequately capitalized in
order to restore its capital levels. Institutions that are adequately capitalized or better are not order to restore its capital levels. Institutions that are adequately capitalized or better are not
subject to supervisory action regarding their capital positions.subject to supervisory action regarding their capital positions.1111 However, an institution that is However, an institution that is
undercapitalized, significantly undercapitalized, or critically undercapitalized is subject to the undercapitalized, significantly undercapitalized, or critically undercapitalized is subject to the
following provisions, according to the FDIC:following provisions, according to the FDIC:12
12 It cannot approve capital distributions or pay management fees.It cannot approve capital distributions or pay management fees.
The FDIC will monitor the condition and compliance of the institution.The FDIC will monitor the condition and compliance of the institution.
It must submit a capital restoration plan to the FDIC within 45 days of becoming It must submit a capital restoration plan to the FDIC within 45 days of becoming
undercapitalized.undercapitalized.
Its asset growth is restricted unless such growth is consistent with the FDIC-Its asset growth is restricted unless such growth is consistent with the FDIC-
approved capital restoration plan.approved capital restoration plan.
It is restricted from engaging in acquisitions, branching, or new lines of business It is restricted from engaging in acquisitions, branching, or new lines of business
unless the FDIC has provided prior approval.unless the FDIC has provided prior approval.
In addition, small banks that are undercapitalized are subject to more frequent examinations,In addition, small banks that are undercapitalized are subject to more frequent examinations,13
13 and undercapitalized banks may not accept brokered deposits.and undercapitalized banks may not accept brokered deposits.1414 Significantly and critically Significantly and critically
undercapitalized institutions face additional provisions, which can include recapitalization undercapitalized institutions face additional provisions, which can include recapitalization
through sale of voting shares, transaction restrictions, and interest rate restrictions paid on through sale of voting shares, transaction restrictions, and interest rate restrictions paid on
deposits. Critically undercapitalized institutions are further prohibited from engaging in certain deposits. Critically undercapitalized institutions are further prohibited from engaging in certain
transactions, amending their bylaws or charters, and making excessive bonuses or compensation. transactions, amending their bylaws or charters, and making excessive bonuses or compensation.
A critically undercapitalized bank may ultimately be taken into FDIC resolution, where it is likely A critically undercapitalized bank may ultimately be taken into FDIC resolution, where it is likely
to be liquidated or sold to a healthier institution.to be liquidated or sold to a healthier institution.1515
Risk-Weighted Capital Requirements
There are separate risk-weighted requirements for the three different types of capital. Because There are separate risk-weighted requirements for the three different types of capital. Because
CET1 is more loss absorbent than other CET1 is more loss absorbent than othertierTier 1 capital and 1 capital and tierTier 1 is more loss absorbent than 1 is more loss absorbent than tierTier 2, 2,
banks are required to hold at least 4.5% common equity, 6% of banks are required to hold at least 4.5% common equity, 6% oftierTier 1 capital, and 8% of total 1 capital, and 8% of total
capital to be considered capital to be considered“"adequately capitalized.adequately capitalized.”" These capital requirements are cumulative, so These capital requirements are cumulative, so
the more loss absorbent types of capital count toward meeting the less stringent requirements. In the more loss absorbent types of capital count toward meeting the less stringent requirements. In
other words, the 4.5% of CET1 also counts toward the other words, the 4.5% of CET1 also counts toward thetierTier 1 requirement, so only up to 1.5% of 1 requirement, so only up to 1.5% of
other othertierTier 1 is needed to meet that requirement. Likewise, the 6% 1 is needed to meet that requirement. Likewise, the 6% tierTier 1 capital counts toward the total capital requirement, so only up to 2% of Tier 1 capital counts toward the
11 There are no regulatory penalties for being adequately capitalized. However, to avoid the capital restrictions
associated with failing to meet the Capital Conservation Buffer (CCB; see main text), banks would need to exceed the
PCA well-capitalized standards. Regulators also evaluate for capital adequacy as part of their supervisory exams, so
banks might seek to maintain well-capitalized status to avoid any negative effect on their CAMELS ratings. For
background on bank supervision, see CRS Report R46648, Bank Supervision by Federal Regulators: Overview and
Policy Issues, by David W. Perkins.
12 FDIC, Formal and Informal Enforcement Actions Manual, “Chapter 5—Prompt Corrective Action,” June 2022, p. 5,
https://www.fdic.gov/regulations/examinations/enforcement-actions/ch-05.pdf.
13 12 U.S.C. §1820(d)(4).
14 12 C.F.R. §337.6 et seq.
15 FDIC, Formal and Informal Enforcement Actions Manual, p. 5.
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total capital requirement, so only up to 2% of tier 2 capital is required to meet that requirement. 2 capital is required to meet that requirement.
Alternatively, a bank could hold 8% CET1 and meet all three requirements.Alternatively, a bank could hold 8% CET1 and meet all three requirements.
On top of those requirements, banks must hold a capital conservation buffer (CCB) composed of On top of those requirements, banks must hold a capital conservation buffer (CCB) composed of
CET1 equal to at least 2.5% to avoid any restrictions on capital distributions (e.g., dividends and CET1 equal to at least 2.5% to avoid any restrictions on capital distributions (e.g., dividends and
share buybacks).share buybacks).1616 As the CCB falls below 2.5%, regulators impose increasing restrictions on As the CCB falls below 2.5%, regulators impose increasing restrictions on
capital distributions, and if the CCB falls to 0.625% or lower, all capital distributions are capital distributions, and if the CCB falls to 0.625% or lower, all capital distributions are
prohibited. The purpose of the buffer, as the name would suggest, is to ensure that banks have prohibited. The purpose of the buffer, as the name would suggest, is to ensure that banks have
enough of a capital buffer in good times that they do not fall below their minimum requirements enough of a capital buffer in good times that they do not fall below their minimum requirements
during an economic downturn. If banks fell below their minimum requirements in a downturn, during an economic downturn. If banks fell below their minimum requirements in a downturn,
they could be forced to suddenly cut back on lending, exacerbating the downturn.they could be forced to suddenly cut back on lending, exacerbating the downturn.
Leverage Ratios
The leverage ratio is the ratio of The leverage ratio is the ratio oftierTier 1 capital (with certain adjustments) to consolidated assets. 1 capital (with certain adjustments) to consolidated assets.
Unlike other regulatory capital ratios, assets are not risk-weighted for purposes of the leverage Unlike other regulatory capital ratios, assets are not risk-weighted for purposes of the leverage
ratio. The rule implementing Basel III raised the minimum leverage ratio from 3% to 4% for ratio. The rule implementing Basel III raised the minimum leverage ratio from 3% to 4% for
certain banks, including those with a strong supervisory rating.certain banks, including those with a strong supervisory rating.1717 (Banks that did not have a strong (Banks that did not have a strong
supervisory rating were already required to maintain a 4% leverage ratio.) In other words, the supervisory rating were already required to maintain a 4% leverage ratio.) In other words, the
value of the bankvalue of the bank’s tier's Tier 1 capital must be equal to at least 4% of the value of the bank 1 capital must be equal to at least 4% of the value of the bank’'s assets to s assets to
be considered adequately capitalized. The bank must maintain a leverage ratio of at least 5% to be be considered adequately capitalized. The bank must maintain a leverage ratio of at least 5% to be
considered well capitalized, however.considered well capitalized, however.
Why have both a leverage ratio and risk-weighted capital ratios? Basel III measures most capital Why have both a leverage ratio and risk-weighted capital ratios? Basel III measures most capital
ratios in terms of RWA to account for the fact that some assets are riskier than others. A basic ratios in terms of RWA to account for the fact that some assets are riskier than others. A basic
tenet of finance is that riskier assets have a higher tenet of finance is that riskier assets have a higher expected rate of return in order to compensate rate of return in order to compensate
the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold
riskier assets, as the same amount of capital must be held against riskier and safer assets. But risk riskier assets, as the same amount of capital must be held against riskier and safer assets. But risk
weights may prove inaccurate. For example, banks held highly rated mortgage-backed securities weights may prove inaccurate. For example, banks held highly rated mortgage-backed securities
(MBSs) before the 2008 financial crisis, in part because those assets had a higher expected rate of (MBSs) before the 2008 financial crisis, in part because those assets had a higher expected rate of
return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses
during the crisis. Thus, the leverage ratio can be thought of as a backstop to ensure that incentives during the crisis. Thus, the leverage ratio can be thought of as a backstop to ensure that incentives
posed by risk-weighted capital ratios to minimize capital and maximize risk within a risk weight posed by risk-weighted capital ratios to minimize capital and maximize risk within a risk weight
do not result in a bank holding insufficient capital.do not result in a bank holding insufficient capital.
The leverage ratio is simpler and more transparent than risk-weighted capital measures because The leverage ratio is simpler and more transparent than risk-weighted capital measures because
the public does not have full information on the risk weight assigned to each asset held by the the public does not have full information on the risk weight assigned to each asset held by the
bank. Therefore, the public can less easily assess whether a bank has enough capital to absorb bank. Therefore, the public can less easily assess whether a bank has enough capital to absorb
potential losses based on risk-weighted ratios. Some policymakers concluded after the 2008 potential losses based on risk-weighted ratios. Some policymakers concluded after the 2008
financial crisis that boosting simpler, more transparent measures of capital can be better at financial crisis that boosting simpler, more transparent measures of capital can be better at
restoring confidence during a crisis.restoring confidence during a crisis.1818
16 All three of the CET1, Tier 1, and total capital requirements must be at least 2.5 percentage points above the
minimum requirements to avoid restrictions on capital distributions. Restrictions on capital distributions are also tied to
the countercyclical capital buffer for applicable banks, which has always been set at zero in practice. See the section
below entitled “Countercyclical Capital Buffer.”
17 In addition to these requirements, a type of depository institution chartered as a federal savings association must
maintain a 1.5% tangible capital ratio. See 12 U.S.C. §1464(t).
18 BCBS, Strengthening the Resilience of the Banking Sector, December 2009, https://www.bis.org/publ/bcbs164.pdf;
Asli Demirguc-Kunt, Enrica Detragiache, and Ouarda Merrouche, Bank Capital: Lessons from the Financial Crisis,
IMF Working Paper WP/10/286, December 2010, https://www.imf.org/external/pubs/ft/wp/2010/wp10286.pdf.
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Community Bank Leverage Ratio (CBLR)1919
In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA; P.L. 115-174). Section 201 of this law mandated that banks with less than $10 (EGRRCPA; P.L. 115-174). Section 201 of this law mandated that banks with less than $10
billion in consolidated assets that meet certain criteria be given the option by regulators to comply billion in consolidated assets that meet certain criteria be given the option by regulators to comply
with a higher leverage ratio instead of having to calculate the various capital requirements, with a higher leverage ratio instead of having to calculate the various capital requirements,
including the more complex risk weights noted above. This made capital rules for smaller including the more complex risk weights noted above. This made capital rules for smaller
institutions tailored to simplify the requirements based on the notion that these institutions pose institutions tailored to simplify the requirements based on the notion that these institutions pose
less risk to financial stability and the FDICless risk to financial stability and the FDIC’'s Deposit Insurance Fund and that complying with s Deposit Insurance Fund and that complying with
complex regulations poses a relatively greater regulatory burden for them. In 2019, the federal complex regulations poses a relatively greater regulatory burden for them. In 2019, the federal
banking agencies jointly issued a final rule that simplified the measure of capital adequacy for banking agencies jointly issued a final rule that simplified the measure of capital adequacy for
qualifying community banking organizations (qualifying criteria are summarized qualifying community banking organizations (qualifying criteria are summarizedinin Table 5) that that
opt in, thereby implementing Section 201 of the EGRRCPA. The rule became effective at the opt in, thereby implementing Section 201 of the EGRRCPA. The rule became effective at the
beginning of 2020. Section 201 granted the bank regulators authority to set the ratio requirement, beginning of 2020. Section 201 granted the bank regulators authority to set the ratio requirement,
so long as it was between 8% and 10%. The regulators settled on 9% in their so long as it was between 8% and 10%. The regulators settled on 9% in their 2019 final rule.20
Large Bank Enhanced Capital Framework
The 2007-2009 financial crisis highlighted the problem of "too big to fail"final rule.20
Table 5. CBLR Framework
Component
Criteria
Qualifying community bank
Less than $10 bil ion in consolidated assets
Off-balance-sheet exposures of 25% or less of
total consolidated assets
Trading assets plus liabilities of 5% or less of total
consolidated assets
Not an advanced approaches organization
Calculation of leverage ratio
Tier 1 capital / Average total consolidated assets
Leverage ratio requirement
Greater than 9%
Source: Federal Reserve, Community Bank Leverage Ratio Framework: Community Bank Compliance Guide, October
29, 2019, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20191029a3.pdf.
In 2020, circumstances related to the COVID-19 pandemic created a short but deep recession and
much uncertainty in the economy, and part of the response from Congress included some
temporary easing of regulatory requirements to support bank profitability. The agencies issued a
final rule that temporarily lowered the CBLR from 9% to 8%, responding to the pandemic and
implementing Section 4012 of the CARES Act (P.L. 116-136). The agencies also established a
transition period to bring the CBLR back to 9%. In 2021, the CBLR was set to 8.5%, and then in
2022 it reverted to 9%. Qualifying institutions were given a two-quarter grace period in 2022 to
bring their leverage ratios in line with the 9% requirement, assuming they maintained at least 8%
in the interim.
In 2020, the FDIC completed a study of the impact the CBLR would have on institutions, finding
that 85% of community banks were eligible to opt in to the CBLR framework because, among
other factors, their leverage ratios already exceeded 9%.21 One of the findings was that while the
19 For more on the CBLR, see CRS Report R45989, Community Bank Leverage Ratio (CBLR): Background and
Analysis of Bank Data, by David W. Perkins.
20 Federal Reserve, OCC, and FDIC, “Federal Bank Regulatory Agencies Issue Final Rule to Simplify Capital
Calculation for Community Banks,” press release, October 29, 2019, https://www.fdic.gov/news/news/press/2019/
pr19100.html.
21 The study found that 87% would have qualified on size and a leverage ratio exceeding 9% alone. FDIC, Analyzing
the Community Bank Leverage Ratio, May 2020, https://www.fdic.gov/analysis/cfr/staff-studies/2020-03.pdf.
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CBLR is a simple calculation and reduces the complexity of various capital requirements for
eligible banks, it is more stringent for many banks than the generally applicable framework is.
At 9 percent, the leverage ratio would become the most stringent capital requirement for
97 percent of CBLR-eligible community banks—a substantial increase from 13 percent
under the generally applicable rule. Thus, a vast majority of community banks that opt into
the CBLR will experience a decrease in their levels of excess capital as measured by their
capital stringencies. Conversely, only 3 percent of CBLR-eligible community banks would
be entering into a less stringent capital regime by opting in to the CBLR framework.
This suggests that for the 1,632 banks that adopted the CBLR framework as of June 2022, the
benefit of avoiding the regulatory burden and reporting requirements of the more complex capital
standards exceeds the cost of complying with higher leverage requirements. This follows from the
fact that most eligible banks already maintained a leverage ratio above 9% and so would not have
to hold any more capital to comply with the CBLR.
Large Bank Enhanced Capital Framework
The 2007-2009 financial crisis highlighted the problem of “too big to fail” financial institutions— financial institutions—
the concept that the failure of large financial firms can trigger financial instability, which in the concept that the failure of large financial firms can trigger financial instability, which in
several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the
2010 Dodd-Frank Wall Street Reform and Consumer Protection Act2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’'s (Dodd-Frank Act; P.L. 111-s (Dodd-Frank Act; P.L. 111-
203) response to addressing financial stability and too big to fail is a new enhanced prudential 203) response to addressing financial stability and too big to fail is a new enhanced prudential
regulatory (EPR) regime that applies to large banks and to nonbank financial institutions regulatory (EPR) regime that applies to large banks and to nonbank financial institutions
designated by the Financial Stability Oversight Council (FSOC) as systemically important designated by the Financial Stability Oversight Council (FSOC) as systemically important
financial institutions (SIFIs). (There are currently no designated SIFIs.financial institutions (SIFIs). (There are currently no designated SIFIs.22)
22)
Title I of the Dodd-Frank Act automatically subjected all bank holding companies (BHCs) and Title I of the Dodd-Frank Act automatically subjected all bank holding companies (BHCs) and
foreign banks with more than $50 billion in assets to EPR. In 2018, foreign banks with more than $50 billion in assets to EPR. In 2018,the EGRRCPA created a more
“tiered” and “tailored”EGRRCPA (P.L. 115-174) created a more "tiered" and "tailored" EPR regime for large banks. EPR regime for large banks.2323 It automatically exempted domestic banks It automatically exempted domestic banks
with assets between $50 billion and $100 billion with assets between $50 billion and $100 billion(five domestic banks at present) from enhanced from enhanced
regulation. The Fed has discretion to apply most individual EPR provisions to banks with regulation. The Fed has discretion to apply most individual EPR provisions to banks with
between $100 billion and $250 billion in assets between $100 billion and $250 billion in assets(10 domestic banks at present) on a case-by-case on a case-by-case
basis if it would promote financial stability or the institutionsbasis if it would promote financial stability or the institutions’' safety and soundness, and the Fed safety and soundness, and the Fed
has proposed exempting them from several EPR requirements.has proposed exempting them from several EPR requirements.
In 2019, the Fed implemented these changes by creating a four-tier system for U.S. banks, with In 2019, the Fed implemented these changes by creating a four-tier system for U.S. banks, with
more stringent requirements at each tier.more stringent requirements at each tier.2424 The Fed used the $100 billion and $250 billion The Fed used the $100 billion and $250 billion
thresholds found in P.L. 115-174, along with other metrics, to define Category III and IV banks. thresholds found in P.L. 115-174, along with other metrics, to define Category III and IV banks.
Table 6 summarizes the definition of each category and the number of U.S. banks in each summarizes the definition of each category and the number of U.S. banks in each
category as of 2021. The 2019 rule requires foreign banks with over $50 billion in U.S. non-category as of 2021. The 2019 rule requires foreign banks with over $50 billion in U.S. non-
branch assets and $250 billion in global assets to form intermediate holding companies (IHCs) to branch assets and $250 billion in global assets to form intermediate holding companies (IHCs) to
house certain U.S. operations. Those IHCs are also placed in the four categories, and the number house certain U.S. operations. Those IHCs are also placed in the four categories, and the number
in each is shown in each is showninin Table 6.
Table 6. Banks Subject to EPR
Other banks with > $250 billion in assets or > $75 billion Table 6.
22 Previously, FSOC had designated four nonbank SIFIs for enhanced prudential regulation; all four have since been
de-designated.
23 BHCs are legal entities that allow more than one bank to be owned within the same ownership group. Banks within a
holding company can be structured as banking subsidiaries. A type of BHC called a financial holding company may
own both bank subsidiaries and nonbank financial subsidiaries.
24 Federal Reserve, “Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign
Banks to More Closely Match Their Risk Profiles,” press release, October 10, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20191010a.htm.
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Table 6. Banks Subject to EPR
As of 2022Q2
Definition
# of U.S. Banks
# of IHCsa
Category I
U.S. G-SIBs
8
0
Category II
Other banks with >$700 bil ion in assets or >$75
1
0
bil ion in cross-jurisdictional activity
Category III
Other banks with >$250 bil ion in assets or >$75
5
6
bil ion in nonbank assets, weighted short-term in nonbank assets, weighted short-term
wholesale funding, or off-balance-sheet exposurewholesale funding, or off-balance-sheet exposure
Category IVCategory IV
Other
All other banks with $100-$250 banks with $100-$250 bil ionbillion in assets
Source: Federal Reserve, "Data Sources and Terms," in in assets
10
6
Source: Federal Reserve, Supervision and Regulation Report, , November 2022, Appendix AJune 2026, ,
https://www.federalreserve.gov/publications/https://www.federalreserve.gov/publications/2022-november2026-june-supervision-and-regulation-report--supervision-and-regulation-report-appendix-a.htm.
data-sources-terms.htm. Notes: G-SIBG-SIB=Globally- = Global Systemically Important Bank, as designated by the Financial Stability Board.Systemically Important Bank, as designated by the Financial Stability Board.
a.
a. Foreign banks with over $50 Foreign banks with over $50 bil ionbillion in U.S. non-branch assets and $250 in U.S. non-branch assets and $250 bil ionbillion in global assets are required in global assets are required
to form intermediate holding companies to house certain U.S. operations.to form intermediate holding companies to house certain U.S. operations.
Under this regime, the Under this regime, the Federal ReserveFed is required to apply a number of safety and soundness is required to apply a number of safety and soundness
requirements to large U.S. banks and IHCs that are more stringent than those applied to smaller requirements to large U.S. banks and IHCs that are more stringent than those applied to smaller
banks. Category I, banks. Category I,comprisedcomposed of banks designated as Global Systemically Important Banks (G- of banks designated as Global Systemically Important Banks (G-
SIBs) by the Financial Stability Board, are subject to the most stringent EPR requirements.SIBs) by the Financial Stability Board, are subject to the most stringent EPR requirements.
Some of these more stringent capital requirements are described in the rest of this section. Many Some of these more stringent capital requirements are described in the rest of this section. Many
of these capital requirements originate from Basel III rather than the Dodd-Frank Act. These of these capital requirements originate from Basel III rather than the Dodd-Frank Act. These
capital requirements determine how the largest banks must fund all of their activities on a day-to-capital requirements determine how the largest banks must fund all of their activities on a day-to-
day basis. In that sense, these requirements arguably have a larger ongoing impact on banksday basis. In that sense, these requirements arguably have a larger ongoing impact on banks’
' marginal costs of providing credit and other services than most of the other EPR provisions that marginal costs of providing credit and other services than most of the other EPR provisions that
impose only fixed compliance costs on banks.impose only fixed compliance costs on banks.2525 For a full overview, see CRS Report R45711, For a full overview, see CRS Report R45711,
Enhanced Prudential Regulation of Large Banks, by Marc Labonte., by Marc Labonte.
Advanced Approaches
Since Basel II, large, complex banks have been required to use Since Basel II, large, complex banks have been required to use “"advanced approachesadvanced approaches”"—more —more
technical, complex procedures—to model risk for more sophisticated financial activities. technical, complex procedures—to model risk for more sophisticated financial activities.
Previously, advanced approaches were required for institutions that had consolidated total assets Previously, advanced approaches were required for institutions that had consolidated total assets
equal to $250 billion or more or consolidated total on-balanceequal to $250 billion or more or consolidated total on-balance -sheet foreign exposures equal to sheet foreign exposures equal to
$10 billion or more. In the 2019 tiering rule, the Fed changed this so that only Category I and II $10 billion or more. In the 2019 tiering rule, the Fed changed this so that only Category I and II
banks are required to use advanced approaches. Other banks may still elect to use advanced banks are required to use advanced approaches. Other banks may still elect to use advanced
approaches if they wish.approaches if they wish.2626
There are other examples of cases where large banks follow more complicated methodology to There are other examples of cases where large banks follow more complicated methodology to
comply with capital rules than those used by smaller banks. For example, another rule in 2019 comply with capital rules than those used by smaller banks. For example, another rule in 2019
simplified the capital treatment of certain assets to reduce regulatory burden. Advanced simplified the capital treatment of certain assets to reduce regulatory burden. Advanced
approaches banks were not allowed to use this simplified capital treatment.approaches banks were not allowed to use this simplified capital treatment.2727 As another example, the rule implementing Basel III required unrealized gains and losses on available-for-sale (AFS) securities (as well as certain other items included in AOCI) As another example,
25 Regulatory compliance costs refers to resources and manpower directly expended on ensuring that a bank is
complying with regulation.
26 Some additional capital requirements apply to those banks that have elected to be advanced approaches banks. For
simplicity, those additional capital requirements are not noted in the summary tables throughout this report.
27 OCC, Federal Reserve, FDIC, “Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant to the
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the rule implementing Basel III required unrealized gains and losses on “available for sale”
securities (as well as certain other items included in AOCI to count toward capital requirements to count toward capital requirements
for advanced approaches banks. Other banks were given a one-time opportunity to opt out of this for advanced approaches banks. Other banks were given a one-time opportunity to opt out of this
requirement.requirement.
Supplementary Leverage Ratio
Basel III introduced a supplementary leverage ratio (SLR) for large banks. G-SIBs, Category II Basel III introduced a supplementary leverage ratio (SLR) for large banks. G-SIBs, Category II
and III banks, and any other bank that elects to be an advanced approaches bank must meet a 3% and III banks, and any other bank that elects to be an advanced approaches bank must meet a 3%
SLR at the holding company level and at the depository subsidiary level to be considered SLR at the holding company level and at the depository subsidiary level to be considered
adequately capitalized. In addition, adequately capitalized. In addition, as a result of a final rule issued in 2025, G-SIBs must also meet an enhanced SLR (eSLR) of 3% plus 50% of the G-SIB's Method 1 capital surcharge at the holding company level.28 For 2025, G-SIBs face a Method 1 surcharge that varied by bank from 1% to 2.5%, so the eSLR at the holding company level would vary from 3.5% to 4.25%.29 For the depository subsidiaries, the eSLR is 3% plus 50% of the G-SIB's Method 1 capital surcharge but can be no more than 4% overall.30 This is a reduction from the previous requirement that G-SIBs meet an eSLR ofG-SIBs must also meet an enhanced SLR (eSLR) of 5% at the 5% at the
holding company level (specifically, G-SIBs must meet a 2% buffer on top of the 3% SLR holding company level (specifically, G-SIBs must meet a 2% buffer on top of the 3% SLR
requirement) to avoid restrictions on discretionary bonuses and capital distributions and 6% at the requirement) to avoid restrictions on discretionary bonuses and capital distributions and 6% at the
depository subsidiary level to be considered well capitalized.depository subsidiary level to be considered well capitalized.28
31
Like the leverage ratio, the SLR uses Like the leverage ratio, the SLR uses tierTier 1 capital in the numerator and unweighted assets in the 1 capital in the numerator and unweighted assets in the
denominator.denominator.32 The difference between the leverage ratio and the SLR is that the SLR includes off- The difference between the leverage ratio and the SLR is that the SLR includes off-
balance-sheet exposures in the denominator. Thus, the numerator is the same, but the denominator balance-sheet exposures in the denominator. Thus, the numerator is the same, but the denominator
is larger.is larger.2933 The SLR is intended to ensure that the bank is adequately safeguarded against off- The SLR is intended to ensure that the bank is adequately safeguarded against off-
balance-sheet losses that are not captured in the leverage ratio. Unanticipated losses related to balance-sheet losses that are not captured in the leverage ratio. Unanticipated losses related to
opaque off-balance-sheet exposures exacerbated uncertainty about banksopaque off-balance-sheet exposures exacerbated uncertainty about banks’' solvency during the solvency during the
2007-2009 financial crisis. According to the regulators, there is less need to subject small banks 2007-2009 financial crisis. According to the regulators, there is less need to subject small banks
to the SLR because small banks on average have fewer off-balance-sheet exposures.to the SLR because small banks on average have fewer off-balance-sheet exposures.
Although the basic principle of leverage ratios is to treat all assets equally, policymakers have
debated whether certain assets should be exempted. Section 402 of P.L. 115-174 allowed for
custody banks—defined by the legislation as banks predominantly engaged in custody,
safekeeping, and asset servicing activities—to no longer hold capital against funds deposited at
certain central banks30 to meet the SLR up to an amount equal to customer deposits linked to
fiduciary, custodial, and safekeeping accounts.31 All other banks would continue to be required to
hold capital against central bank deposits. According to the implementing rule, the Bank of New
York Mellon, Northern Trust, and State Street were the only banks that qualified for this
exemption at the time.32
In response to the rapid increase in safe assets on bank balance sheets during the pandemic, the
banking regulators provided temporary SLR relief by excluding Treasury securities and balances
Economic Growth and Regulatory Paperwork Reduction Act of 1996,” 84 Federal Register 35234, July 22, 2019,
https://www.govinfo.gov/content/pkg/FR-2019-07-22/pdf/2019-15131.pdf.
28 OCC et al., “Regulatory Capital Rules,” 79 Federal Register 24528, May 1, 2014, https://www.gpo.gov/fdsys/pkg/
FR-2014-05-01/pdf/2014-09367.pdf.
29 Because of the larger denominator, regulators estimated that an SLR of 3% is equivalent to a leverage ratio of 4.3%,
on average. Thus, the 3% SLR requires affected banks to hold more capital on average than the 4% leverage ratio does.
30 The central banks that currently qualify for this exemption include all countries belonging to the Organization for
Economic Cooperation and Development (OECD) except Mexico and Turkey. For a list, see OECD, Country Risk
Classifications of the Participants to the Arrangement on Officially Supported Export Credits, January 26, 2018,
http://www.oecd.org/trade/xcred/cre-crc-current-english.pdf.
31 For more information, see CRS In Focus IF10812, Financial Reform: Custody Banks and the Supplementary
Leverage Ratio, by Rena S. Miller.
32 Board of Governors of the Federal Reserve System, FDIC, OCC, “Agencies Finalize Changes to Supplementary
Leverage Ratio as Required by Economic Growth, Regulatory Relief, and Consumer Protection Act,” press release,
November 19, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191119a.htm.
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held at the Fed from the denominator.33 That relief expired at the end of March 2021, although
bank balance sheets still remain larger than before the pandemic.
G-SIB Capital Surcharges
than other banks in the form of a common equity surcharge of at least 1% to than other banks in the form of a common equity surcharge of at least 1% to“"reflect the greater reflect the greater
risks that they pose to the financial system.risks that they pose to the financial system.”34"40 In July 2015, the Fed issued a final rule that began In July 2015, the Fed issued a final rule that began
phasing in this capital surcharge in 2016.phasing in this capital surcharge in 2016.3541 Each G-SIB is assigned a surchargeEach G-SIB is assigned a surcharge, added to the bank's capital buffer, whose size is whose size is
based on a formula intended to reflect its systemic importance.based on a formula intended to reflect its systemic importance. Under the rule, the capital Under the rule, the capital
surcharge can be between 1% and 4.5%. The Fed stated that under its rule, most G-SIBs would surcharge can be between 1% and 4.5%. The Fed stated that under its rule, most G-SIBs would
face a higher capital surcharge than required by Basel III. For face a higher capital surcharge than required by Basel III. For2022October 2025, the surcharge varied between , the surcharge varied between
1% and 1% and34.5%..5%.36
42 Stress Tests, Capital Planning, and the Stress Capital Buffer
Large banksLarge banks’' capital requirements are partly determined by stress tests, capital planning, and the capital requirements are partly determined by stress tests, capital planning, and the
stress capital bufferstress capital buffer (SCB)—policies that work together to ensure that large banks have enough capital to —policies that work together to ensure that large banks have enough capital to
survive a crisis. Title I of the Dodd-Frank Act required (1) company-run stress tests for any (bank survive a crisis. Title I of the Dodd-Frank Act required (1) company-run stress tests for any (bank
or nonbank) financial firm with more than $10 billion in assets, which P.L. 115-174 raised to or nonbank) financial firm with more than $10 billion in assets, which P.L. 115-174 raised to
more than $250 billion in assets (with Fed discretion to apply to financial firms with between more than $250 billion in assets (with Fed discretion to apply to financial firms with between
$100 billion and $250 billion in assets); and (2) Fed-run (or $100 billion and $250 billion in assets); and (2) Fed-run (or“supervisory”"supervisory") stress tests for any ) stress tests for any
BHC or nonbank SIFI with more than $50 billion in assets, which P.L. 115-174 raised to more BHC or nonbank SIFI with more than $50 billion in assets, which P.L. 115-174 raised to more
than $100 billion in assets.than $100 billion in assets.
Stress test requirements were implemented through final rules in 2012, effective beginning in
2013.37 43
Stress tests attempt to project the losses that banks would suffer under a hypothetical Stress tests attempt to project the losses that banks would suffer under a hypothetical
deterioration in economic and financial conditions to determine whether banks would remain deterioration in economic and financial conditions to determine whether banks would remain
solvent in a future crisis. Unlike general capital requirements that are based on current asset solvent in a future crisis. Unlike general capital requirements that are based on current asset
values, stress tests incorporate an adverse scenario that focuses on values, stress tests incorporate an adverse scenario that focuses onprojected asset valuesthe bank's projected asset values and credit losses based on based on
specific areas of concern each year. For example, in specific areas of concern each year. For example, in20222026, the scenario is , the scenario is “"a severe global a severe global
recession with heightened stress in commercial real estate and corporate debt markets.”38
33 Board of Governors of the Federal Reserve System, FDIC, OCC, “Regulators Temporarily Change the
Supplementary Leverage Ratio to Increase Banking Organizations’ Ability to Support Credit to Households and
Businesses in Light of the Coronavirus Response,” press release, May 15, 2020, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20200515a.htm.
34 Bank for International Settlements, Basel III Summary Table, http://www.bis.org/bcbs/basel3/b3summarytable.pdf.
35 Federal Reserve, “Risk-Based Capital Guidelines: Implementation of Capital Requirements for Global Systemically
Important Bank Holding Companies,” 80 Federal Register 49082, August 14, 2015, https://www.federalreserve.gov/
newsevents/press/bcreg/20150720a.htm.
36 Federal Reserve, Large Bank Capital Requirements, August 2022, https://www.federalreserve.gov/publications/files/
large-bank-capital-requirements-20220804.pdf.
37 Federal Reserve, “Annual Company-Run Stress Test Requirements,” 77 Federal Register 62396, October 12, 2012,
https://www.gpo.gov/fdsys/pkg/FR-2012-10-12/pdf/2012-24988.pdf; and Federal Reserve, “Supervisory and
Company-Run Stress Test Requirements,” 77 Federal Register 62378, October 12, 2012, https://www.gpo.gov/fdsys/
pkg/FR-2012-10-12/pdf/2012-24987.pdf.
38 Federal Reserve, “Federal Reserve Board Releases Hypothetical Scenarios for Its 2022 Bank Stress Tests,” press
release, February 10, 2022, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220210a.htm.
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The final rule for capital planning was implemented in 2011.39 Under the rule, recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets."44
Under the capital planning rule, each bank must each bank must
submit a capital plan to the Fed annually. The capital plan must include a projection of the submit a capital plan to the Fed annually. The capital plan must include a projection of the
expected uses and sources of capital, including planned debt or equity issuance and dividend expected uses and sources of capital, including planned debt or equity issuance and dividend
payments. The plan must demonstrate that the bank will remain in compliance with capital
requirements under the stress tests. In earlier years, banks would “pass” or “fail” on quantitative
(whether the bank would have insufficient capital under the stress tests) and qualitative (the
adequacy of bank’s risk management policies and processes) grounds. Typically, the Fed would
require banks to revise their capital plans to address the objections raised by the Fed (assuming
the bank does not successfully appeal).40 The Fed could block the bank’s planned capital
distributions if it did not submit an acceptable capital plan.
Over the years, regulators and Congress have taken steps to reduce the regulatory burden of stress
tests. To the extent that stress tests effectively reduce the probability of a large bank failure, these
steps may have also increased the risk of failure during a crisis. In addition to reducing the
number of firms subject to stress testing, P.L. 115-174 also reduced the number of stress test
scenarios and the frequency of company-run stress tests from semi-annually to periodically. The
Fed also reduced the frequency of Fed-run stress tests for banks with between $100 billion and
$250 billion to every other year in 2019.41 In 2019, the Fed made changes to the stress test
process to increase its transparency.42 Between 2017 and 2019, the qualitative pass/fail was
phased out on the grounds that banks’ capital plans had improved over the years.43 The
quantitative pass/fail was eliminated in 2020 by the introduction of the stress capital buffer.
Stress Capital Buffer
Stress tests and capital planning requirements provide the Fed with an assessment of whether
large banks have enough capital to withstand another crisis as simulated using a specific adverse
scenario developed by the Fed. This is similar to the role of capital requirements more generally
and creates some overlap and redundancy between the two. As noted by the Fed, before 2020,
banks with more than $100 billion in assets had to simultaneously comply with 18 capital
requirements and G-SIBs had to simultaneously comply with 24 different capital requirements,
each addressing a separate but related risk.44
39 Federal Reserve, “Capital Plans,” 76 Federal Register 74631, December 1, 2011, https://www.federalreserve.gov/
reportforms/formsreview/RegY13_20111201_ffr.pdf. For more information, see Federal Reserve, Capital Planning at
Large Bank Holding Companies, August 2013, https://www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf.
40 Yearly results are available at https://www.federalreserve.gov/supervisionreg/ccar-by-year.htm.
41 Banks subject to stress tests every other year use those results to determine their capital requirements for two years.
Federal Reserve, “Federal Reserve Board Releases Scenarios for 2019 Comprehensive Capital Analysis and Review
(CCAR) and Dodd-Frank Act Stress Test Exercises,” press release, February 5, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20190205b.htm.
42 Federal Reserve, “Federal Reserve Board Finalizes Set Of Changes That Will Increase The Transparency Of Its
Stress Testing Program For Nation’s Largest And Most Complex Banks,” Press Release, February 5, 2019, at
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm.
43 Federal Reserve, “Amendments to the Capital Plan and Stress Test Rules,” 81 Federal Register 9308,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170130a.htm. Federal Reserve, “Stress Tests,”
website, https://www.federalreserve.gov/supervisionreg/stress-tests-capital-planning.htm.
44 The 24 capital requirements can be grouped into a few major categories, and all requirements in that category are
very similar. In that sense, having a large number of capital requirements does not create as great of a compliance
burden as the number suggests. Rather, the economic burden associated with a large number of requirements stems
from the fact that banks change their behavior to comply with the binding requirement, and multiple requirements make
it more likely that the binding requirement could periodically shift and banks would adjust their behavior to take that
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To try to minimize what it perceived as redundancy between these various measures, the Fed
finalized a rule in 2020 to combine elements of the stress tests and the Basel III requirements.45
Under the final rule, banks with more than $100 billion in assets have to simultaneously comply
with eight capital requirements and G-SIBs have to simultaneously comply with 14 capital
requirements. The final rule accomplished this by eliminating five requirements tied to the
“adverse” scenario in the stress tests, which the Fed is allowed to do under P.L. 115-174, and by
combining four requirements tied to the “severely adverse” stress tests with four Basel III capital
requirements.
Previously, large banks were required to hold CCBs equal to 2.5% of their RWA (as described
above) to avoid limitations on capital distributions. (The CCB remains unchanged for smaller
banks that have not elected to comply with the CBLR.) Under previous capital planning
requirements, large banks were also required to hold enough capital to still meet the minimum
amount required under the common equity, tier 1, total capital, and leverage requirements after
their stress test losses, planned capital distributions (such as dividends and share buybacks), and
projected balance sheet growth (because an increase in assets requires a proportional increase in
capital).
The final rule replaced these separate requirements with a combined stress capital buffer (SCB)
thatpayments.
Since 2020, stress test losses have been incorporated into capital requirements for large banks through the SCB.45 The SCB requires banks to hold enough capital to cover stress test losses and dividends or 2.5% of requires banks to hold enough capital to cover stress test losses and dividends or 2.5% of
RWARWAs, whichever is larger.46 In other words, the SCB is at least as large as the CCB, which smaller banks must comply with.
Countercyclical Capital Buffer (CCYB)
The banking regulators also issued a final rule implementing a Basel III CCYB, whichever is larger (see Figure 1). The former is less restrictive than what banks
previously faced if their projected capital levels fell below the minimum under stress test
requirements.46 Capital requirements would also be lowered for banks that had previously faced
binding leverage constraints based on stress test results. (For a discussion of this concept, see the
section below entitled “Binding Requirements.”) Because the SCB eliminates the leverage ratio
from stress tests, the Fed argues that the leverage ratio appropriately reverts to being more of a
backstop than a binding constraint.47
Because the Fed decided that banks would no longer have to hold capital to account for capital
distributions (other than dividends) or balance sheet growth, the SCB reduces capital
requirements relative to previous stress tests for non-G-SIBs. However, whether the SCB would
be a lower capital requirement than the previous stress test requirements and the risk-weighted
Basel III requirements it is replacing depends on the size of its losses under the stress tests. If
losses are less than 2.5%, then a bank is required to hold the same amount of capital (2.5%) under
possibility into account.
45 Federal Reserve, “Federal Reserve Board Approves Rule to Simplify Its Capital Rules for Large Banks, Preserving
the Strong Capital Requirements Already in Place,” press release, March 4, 2020, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20200304a.htm.
46 The Fed has provided three justifications for making these requirements less stringent. First, the Fed argues that
because capital distributions would automatically face restrictions if banks’ capital fell below their SCBs, it would no
longer be necessary for firms to hold enough capital to meet all planned capital distributions. However, restrictions are
phased in gradually and distributions are not entirely forbidden unless a bank has depleted all but 0.625% of its SCB.
Second, the Fed argues for removing stock repurchases from capital planning on the grounds that only dividends are
likely to be continued as planned in a period of financial stress. Finally, the Fed argues that its previous assumption that
balance sheets continue to grow in a stressed environment was an unreasonable one—although the COVID crisis that
began one month after the SCB rule was finalized demonstrated that bank balance sheets can grow significantly during
crises. Federal Reserve, “Proposed Rule Regarding the Stress Buffer Requirements,” staff memorandum, April 5, 2018,
pp. 11-13.
47 The proposed rule would have also required banks to comply with a stress leverage buffer based on the leverage
ratio. The final rule omitted it, in part, to make the leverage ratio more of a backstop. Federal Reserve, “Draft Final
Rule Regarding the Stress Capital Buffer,” staff memorandum, February 19, 2020, https://www.federalreserve.gov/
newsevents/pressreleases/files/bcreg20200304a1.pdf.
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the SCB as it did previously under the CCB. If they are more than 2.5%, then a bank is required
to hold less capital under the SCB than previously under the Comprehensive Capital Analysis and
Review stress tests because the SCB includes fewer factors that require additional capital.48 For
G-SIBs, there is an additional consideration—the SCB is higher if stress tests were previously the
binding constraint, because the SCB includes the G-SIB surcharge and the stress tests did not.
Figure 1. Risk-Weighted Capital Requirements for Large Banks
Common Equity Tier 1
Source: Congressional Research Service (CRS).
Notes: CCB = Capital Conservation Buffer, SCB = Stress Capital Buffer, GSIB = Global Systemically Important
Bank.
At the time the rule was finalized, the Fed calculated what would have happened if the SCB had
been in place in recent years. It found that the SCB would have reduced required capital for large
banks that are not G-SIBs (because the stress test is currently the binding constraint) by between
$5 billion and $53 billion and would have required G-SIBs to hold between $6 billion less and
$84 billion more capital (because the G-SIB surcharge is being added to the SCB). Overall,
capital requirements would have increased by an average of $11 billion in those years.49
Countercyclical Capital Buffer (CCYB)
The banking regulators also issued a final rule implementing a Basel III countercyclical capital
buffer, which now applies to Category I, II, and III banks. The countercyclical buffer requires , which now applies to Category I, II, and III banks. The countercyclical buffer requires
these banks to hold more capital than other banks when regulators believe that financial these banks to hold more capital than other banks when regulators believe that financial
conditions make the risk of losses abnormally high. In normal times, the countercyclical buffer is conditions make the risk of losses abnormally high. In normal times, the countercyclical buffer is
48 For G-SIBs, if stress test losses exceeded 2.5%, a bank would be required to hold less capital only if the sum of the
bank’s capital distributions and projected balance sheet growth were greater than the sum of the bank’s G-SIB
surcharge and dividends.
49 Federal Reserve, “Draft Final Rule Regarding the Stress Capital Buffer.”
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to be set at zero, but in high-risk circumstances, it could be set as high as 2.5%.to be set at zero, but in high-risk circumstances, it could be set as high as 2.5%.5047 In practice, it In practice, it
has always been set at zero since inception.has always been set at zero since inception.
Total Loss Absorbing Capacity
The Fed issued a 2017 final rule implementing a The Fed issued a 2017 final rule implementing a Total Loss Absorbing Capacitytotal loss-absorbing capacity (TLAC) (TLAC)
requirement for U.S. G-SIBs and U.S. operations of foreign G-SIBs effective at the beginning of requirement for U.S. G-SIBs and U.S. operations of foreign G-SIBs effective at the beginning of
2019.2019.5148 The rule requires U.S. G-SIBs to hold TLAC equal to at least 18% of RWA and 7.5% of The rule requires U.S. G-SIBs to hold TLAC equal to at least 18% of RWA and 7.5% of
unweighted assets (including off-balance-sheet exposures) at the holding company level. TLAC is unweighted assets (including off-balance-sheet exposures) at the holding company level. TLAC is
composed of composed oftierTier 1 capital and a minimum amount of long-term debt (equal to the greater of 1 capital and a minimum amount of long-term debt (equal to the greater of 42.5% .5%
plus 50% of the Method 1 G-SIB surcharge of unweighted assets including off-balance-sheet exposures or 6% plus the G-SIB surcharge of of unweighted assets including off-balance-sheet exposures or 6% plus the G-SIB surcharge of
RWA) issued by the holding company.RWA) issued by the holding company.5249 (Tier 1 capital held to meet other capital requirements (Tier 1 capital held to meet other capital requirements
counts toward the TLAC requirement up to the eligible limit.) In addition, G-SIBs counts toward the TLAC requirement up to the eligible limit.) In addition, G-SIBswould be
are subject to a TLAC buffer.subject to a TLAC buffer.50 If TLAC fell below the buffer level, the G-SIB would face restrictions If TLAC fell below the buffer level, the G-SIB would face restrictions
on capital distributions and discretionary bonuses. TLAC requirements do not require banks to on capital distributions and discretionary bonuses. TLAC requirements do not require banks to
hold more capital but rather can be met through additional capital or eligible long-term debt.hold more capital but rather can be met through additional capital or eligible long-term debt.
TLAC is intended to make these equity and debt holders absorb losses by writing off existing TLAC is intended to make these equity and debt holders absorb losses by writing off existing
equity and converting debt to equity in the event of the firmequity and converting debt to equity in the event of the firm’'s insolvency, a process referred to as s insolvency, a process referred to as
bank bank“"bail ins.bail ins.”" This furthers the policy goal of avoiding taxpayer bailouts of large financial This furthers the policy goal of avoiding taxpayer bailouts of large financial
firms.firms.
Dodd-Frank Emergency Requirements
For banks with more than $250 billion in assets, the Dodd-Frank Act imposed an emergency limit For banks with more than $250 billion in assets, the Dodd-Frank Act imposed an emergency limit
of 15-to-1 on the bankof 15-to-1 on the bank’'s ratio of liabilities to equity capital (sometimes referred to as a leverage s ratio of liabilities to equity capital (sometimes referred to as a leverage
ratio, although this definition differs from the leverage ratio that applies to all banks).ratio, although this definition differs from the leverage ratio that applies to all banks).5351 The ratio The ratio
is applied only if a bank receives written warning from FSOC that it poses a is applied only if a bank receives written warning from FSOC that it poses a“"grave threat to U.S. grave threat to U.S.
financial stability,financial stability,”" and it ceases to apply when the bank no longer poses a grave threat. To date, and it ceases to apply when the bank no longer poses a grave threat. To date,
this provision has never been triggered.this provision has never been triggered.
The Dodd-Frank Act also requires the Fed to The Dodd-Frank Act also requires the Fed to “"establish a series of specific remedial actionsestablish a series of specific remedial actions”" to to
reduce the probability that a bank with more than $250 billion in assets experiencing financial reduce the probability that a bank with more than $250 billion in assets experiencing financial
distress will fail. Early remediation is the principle that financial problems at banks should be distress will fail. Early remediation is the principle that financial problems at banks should be
addressed early before they become more serious. This establishes a requirement for BHCs
50 Federal Reserve, “Regulatory Capital Rules: The Federal Reserve Board’s Framework for Implementing the U.S.
Basel III Countercyclical Capital Buffer,” 81 Federal Register 63682, September 16, 2016,
https://www.federalreserve.gov/newsevents/press/bcreg/20160908b.htm.
51 12 C.F.R. Chapter II, Subchapter A, Part 252. Federal Reserve, “Total Loss-Absorbing Capacity, Long-Term Debt,
and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies,” 82 Federal
Register 8266, January 24, 2017, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20161215a.htm.
52 Capital required by TLAC is not in addition to capital required under standard capital requirements, and standard
capital requirements are the same or higher than TLAC. However, TLAC capital must be issued by the holding
company, whereas banks must meet standard capital requirements at both the depository subsidiary level and the
holding company level. Some banks might have to hold more capital to meet both of these requirements
simultaneously.
53 12 C.F.R. §225.220. Federal Reserve, “Enhanced Prudential Standards,” 79 Federal Register 17240, March 27,
2014, https://www.gpo.gov/fdsys/pkg/FR-2014-03-27/pdf/2014-05699.pdf. Unlike the leverage ratio found in Basel III,
this emergency ratio is based on liabilities instead of assets. It is calculated as total liabilities relative to total equity
capital minus goodwill. This ratio is inverted compared with the leverage ratio—capital is in the numerator rather than
the denominator.
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addressed early before they become more serious. This establishes a requirement for BHCs similar in spirit to the prompt corrective action requirements that apply to insured depository similar in spirit to the prompt corrective action requirements that apply to insured depository
subsidiaries. Unlike prompt corrective action, early remediation requirements are not based solely
on capital adequacy. As the financial condition of a firm deteriorates, statute requires the steps
taken under early remediation to become more stringent, increasing in four steps from heightened
supervision to resolution. subsidiaries. The Fed issued a proposed rule in 2011 to implement this provision that The Fed issued a proposed rule in 2011 to implement this provision that
to date has not been finalized.to date has not been finalized.54
52 Summary of Large Bank Capital Requirements
Table 7 summarizes the applicability of the EPR requirements discussed in this section of the summarizes the applicability of the EPR requirements discussed in this section of the
report.report.
Table 7. EPR Capital-Related Requirements
Category II
Category IV
(>$700B
Category III
(other
Category I
assets or see
(>
$250B or
$100B-
Requirement
(G-SIBs)
notes)
see notes)
$250B)
Company-run stress tests
annual
annual
biannual
none
Fed-run stress tests
annual
annual
annual
biannual
Capital plan
annual
annual
annual
annual
Company-run stress tests
Emergency 15-to-1 debt-to-equity
applies
applies
applies
none
ratio
Stress capital buffer
applies
applies
applies
applies
SLR
more stringent
applies
applies
not required
eSLR applies
Advanced approaches
applies
applies
not required
not required
Countercyclical capital buffer
applies
applies
applies
none
Total Loss Absorbency Capacity
applies
none
none
none
G-SIB capital surcharge
applies
none
none
none
Source: CRS.
Notes: SLR = Supplementary Leverage Ratio, eSLR = enhanced Supplementary Leverage Ratio, G-SIB = Global , G-SIB = Global
Systemically Important Bank. Banks under $700 Systemically Important Bank. Banks under $700bil ionbillion in assets are ranked as Category II if they have over $75 in assets are ranked as Category II if they have over $75
bil ionbillion in cross-jurisdictional activity. Banks under $250 in cross-jurisdictional activity. Banks under $250 bil ionbillion in assets are ranked as Category III if they have in assets are ranked as Category III if they have
more than $75 more than $75bil ionbillion in nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposure. in nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposure.
For brevity, this table does not specify whether each requirement is applied to a foreign bankFor brevity, this table does not specify whether each requirement is applied to a foreign bank’'s intermediate s intermediate
holding company or total U.S. operations.holding company or total U.S. operations.
Summary of Risk-Weighted and Leverage Capital Requirements
The basic capital requirements discussed in this report are summarized The basic capital requirements discussed in this report are summarizedinin Figure 2 1 for risk-for risk-
weighted requirementsweighted requirements and Figure3 2 for leverage requirements.
for leverage requirements.
54 Federal Reserve, “Enhanced Prudential Standards and Early Remediation Requirements,” 77 Federal Register 594,
January 5, 2012, https://www.gpo.gov/fdsys/pkg/FR-2012-01-05/pdf/2011-33364.pdf.
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Figure 2. Adequate Risk-Weighted Prompt Corrective Action
Requirements and Buffers
Source: CRS based on bank regulatory capital rules.
Notes: Banks can use common equity tier 1 (CET1) capital to meet other tier 1 requirements and any tier 1
capital to meet tier 2 requirements. See text for definitions. Regulators may set the Globally Systemically
Important Bank (G-SIB) surcharge as high as 4.5%, but no bank’s surcharge currently exceeds 3.5%. Regulators
have set the Countercyclical Capital Buffer (CCYB) at zero since its introduction but have the ability to raise it (CCYB) at zero since its introduction but have the ability to raise it
above zero. For capital requirements for above zero. For capital requirements forCommunity Bank Leveragecommunity bank leverage ratio (CBLR) banks, (CBLR) banks, seesee Figure 3.
2.32. Prompt Corrective Action Leverage Requirements
Source: CRS based on bank regulatory capital rules.CRS based on bank regulatory capital rules.
Notes:HC = holding company; dep sub = depository subsidiary. HC requirement is not a PCA requirement.
See text for other definitions.
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Bank Capital Requirements: A Primer and Policy Issues
Policy Issues
Capital rules are ever evolving as new developments and unintended consequences of existing
rules emerge. Changes may arise from Basel initiatives, bank regulator initiatives, or legislation.
This section considers current prominent proposals to alter existing rules. According to Fed Vice
Chair for Supervision Michael Barr, the Fed is currently undergoing a “holistic review of capital
standards.”55 Although not limited to large banks, the review is expected to focus on a number of
capital standards that apply only to large banks. For example, the review is considering changes
to the stress tests, the SLR, and TLAC and how to implement the Basel III Endgame.
Should Capital Levels Be Higher or Lower?
B = billion; CBLR = community bank leverage ratio; dep sub = depository subsidiary; G-SIB = Global Systemically Important Bank; SLR = supplementary leverage ratio. Holding company (HC) requirement is a required buffer, not a prompt corrective action requirement. See text for other definitions. Policy Issues Since the Basel process began, there has been debate over (1) whether capital requirements should be set higher or lower and (2) what role leverage requirements should play compared to risk-weighted requirements. Should Capital Levels Be Higher or Lower? Banks often complain that capital requirements are too high, whereas their critics argue that they Banks often complain that capital requirements are too high, whereas their critics argue that they
are not high enough.are not high enough.5653 But what is the optimal level for capital requirements? This is not a But what is the optimal level for capital requirements? This is not a
straightforward question to answer. As a thought experiment, if leverage requirements were set at straightforward question to answer. As a thought experiment, if leverage requirements were set at
100%, no bank would ever fail. But since capital is a more expensive funding source than debt or 100%, no bank would ever fail. But since capital is a more expensive funding source than debt or
deposits, some argue this would lead to banks providing too little credit and deposits, some argue this would lead to banks providing too little credit andrisk economic economic
activity moving outside the banking system.activity moving outside the banking system.5754 (Whether those risks would still be a policy (Whether those risks would still be a policy
concern once outside the banking system would be another factor to consider in setting capital concern once outside the banking system would be another factor to consider in setting capital
requirementsrequirements, as many nonbank financial firms do not face comparable capital requirements.) as many nonbank financial firms do not face comparable capital requirements.)
Theoretically, capital requirements could be designed to achieve the goals of safety and Theoretically, capital requirements could be designed to achieve the goals of safety and
soundness and financial stability with the least distortion in specific economic activities. They soundness and financial stability with the least distortion in specific economic activities. They
would be set high enough that, along with other prudential requirements, bank failures would not would be set high enough that, along with other prudential requirements, bank failures would not
be frequent enough to cause systemic risk (which imposes economic costs) or require taxpayer be frequent enough to cause systemic risk (which imposes economic costs) or require taxpayer
support.support.5855 But they would not be set so high that the societal benefit of reduced risk exceeds the But they would not be set so high that the societal benefit of reduced risk exceeds the
societal costs associated with reduced credit intermediation.societal costs associated with reduced credit intermediation.59
56
Others might argue that regulation could be replaced by market discipline—private debt holders Others might argue that regulation could be replaced by market discipline—private debt holders
and depositors might be expected to independently gravitate to well-capitalized banks, as such and depositors might be expected to independently gravitate to well-capitalized banks, as such
banks maximize the chance that their obligations would be honored, in which case regulatory banks maximize the chance that their obligations would be honored, in which case regulatory
requirements could be viewed as redundant. But in the presence of the taxpayer safety net, these requirements could be viewed as redundant. But in the presence of the taxpayer safety net, these
incentives are blunted. incentives are blunted. For example, insured depositors face limited risk that they will suffer losses if their bank fails. Further, because an individual bank (or its creditor) does not price in how Further, because an individual bank (or its creditor) does not price in how
its failure would affect financial stability, private costs are not aligned with social costs.60 As a
55 Vice Chair for Supervision Michael S. Barr, Why Bank Capital Matters, speech at the American Enterprise Institute,
Washington, DC, December 1, 2022, https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.
56 Anat R. Admati et al., Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank
Equity is Not Expensive, working paper, March 23, 2011, https://gsbapps.stanford.edu/researchpapers/library/
RP2065R1&86.pdf; Greg Baer and Francisco Covas, “As U.S. Regulators Implement the 2017 Basel Accord, It’s Time
for a Reality-Based Assessment of Current Capital Levels,” Bank Policy Institute, November 10, 2022, https://bpi.com/
as-u-s-regulators-implement-the-2017-basel-accord-its-time-for-a-reality-based-assessment-of-current-capital-levels/.
57 This thought experiment could be expanded to address the extent to which the inexpensive provision of deposit
services in the current system provides a social benefit.
58 BCBS, An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements, August
2010, https://www.bis.org/publ/bcbs173.pdf.
59 Although adjusting capital requirements results in a trade-off between risk and credit availability at moderate capital
levels, if capital requirements were below some minimal threshold, raising capital requirements could boost credit
availability over time by delivering a more stable banking system.
60 Because banks that are “too big to fail” pose more systemic risk and more potential strain on the safety net than small
banks do, the argument would be that capital requirement for them should theoretically be set higher than for small
banks to align with their social costs.
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its failure would affect financial stability, private costs are not aligned with social costs.57 As a result of these two factors, banks would not be expected to hold enough capital voluntarily, and result of these two factors, banks would not be expected to hold enough capital voluntarily, and
thus some argue capital requirements would be necessary to achieve a socially optimal outcome.thus some argue capital requirements would be necessary to achieve a socially optimal outcome.
In addition, capital levels are pro-cyclical (meaning capital declines when credit losses rise during In addition, capital levels are pro-cyclical (meaning capital declines when credit losses rise during
recessions and rises when credit losses decline in booms), so capital adequacy is not meaningfully recessions and rises when credit losses decline in booms), so capital adequacy is not meaningfully
tested until a downturn, and it is tested for resiliency against financial instability even less tested until a downturn, and it is tested for resiliency against financial instability even less
frequently.frequently.6158 After the fact, the failure of 489 banks from 2008 to 2013 demonstrates that capital After the fact, the failure of 489 banks from 2008 to 2013 demonstrates that capital
requirements were too low (or at least overall prudential regulation was not strict enough) before requirements were too low (or at least overall prudential regulation was not strict enough) before
Basel III.62 A total of eight failures from 2018 to 2022 might provide some indication thatBasel III.59 While only 19 banks failed from 2018 to 2026, three of these failures (in 2023) were among the largest failures in U.S. history. While the smaller number of failures may suggest capital levels are adequate or even more than sufficient, these three large bank failures have sparked debate over whether and how the capital framework for larger, more complex institutions might be amended. Further, capital
requirements are no longer too low after Basel III, although the banking sector has not been under
comparable strain since. But the answer to the normative question of whether current capital the answer to the normative question of whether current capital
requirements are too high, too low, or about right would need to be modeled based on theory and requirements are too high, too low, or about right would need to be modeled based on theory and
underlying assumptions about the societal costs and benefits associated with capital requirements. underlying assumptions about the societal costs and benefits associated with capital requirements.
Studies have reached different conclusions about optimal capital levels because they rely on Studies have reached different conclusions about optimal capital levels because they rely on
different theory and underlying assumptions.different theory and underlying assumptions.63
60
Another major point of debate is whether capital requirements should be simpler or more Another major point of debate is whether capital requirements should be simpler or more
complex. Over time, capital requirements have become more complex and sophisticated as the complex. Over time, capital requirements have become more complex and sophisticated as the
business of banking has become more complex and more sophisticated analytical tools have been business of banking has become more complex and more sophisticated analytical tools have been
developed to model risk. Yet simple rules have lower compliance costs,developed to model risk. Yet simple rules have lower compliance costs,6461 and some economists and some economists
argue that simple rules are more resilient in the face of economic uncertainty.argue that simple rules are more resilient in the face of economic uncertainty.6562 If risk weighting If risk weighting
is accurate, it improves efficiency by accurately matching capital to risk, but if inaccurate, it is accurate, it improves efficiency by accurately matching capital to risk, but if inaccurate, it
reduces efficiency by drawing too much bank funding to activities with artificially low risk reduces efficiency by drawing too much bank funding to activities with artificially low risk
weights and too little to activities with artificially high risk weights. Artificially low risk weights weights and too little to activities with artificially high risk weights. Artificially low risk weights
on MBS and other securitized products encouraging banks to hold those products in the run up to on MBS and other securitized products encouraging banks to hold those products in the run up to
the financial crisis is an example of how capital requirements can backfire and contribute to the the financial crisis is an example of how capital requirements can backfire and contribute to the
financial instability that they are intended to prevent. Because risks are frequently not revealed financial instability that they are intended to prevent. Because risks are frequently not revealed
until downturns, these inaccuracies could be in place for several years before they become until downturns, these inaccuracies could be in place for several years before they become
obvious.obvious.
Binding Requirements
Over the past several decades, capital regulations have evolved to account for more complex risks Over the past several decades, capital regulations have evolved to account for more complex risks
in the marketplace. For example, capital requirements were once based on city population, then in the marketplace. For example, capital requirements were once based on city population, then
deposit volume, then total assets, and now deposit volume, then total assets, and nowRWA (seeRWAs (see the Appendix). However, one somewhat recent . However, one somewhat recent
trend has been the return to simpler leverage measures of capital requirements either in addition
61 Further, capital requirements could exacerbate downturns—if banks make fewer loans during downturns to stop
themselves from falling below capital requirements, it would further decrease economic activity.
62 Data available at https://www.fdic.gov/bank/historical/bank/.
63 Simon Firestone, Amy Lorenc and Ben Ranish, An Empirical Economic Assessment of the Costs and Benefits of
Bank Capital in the US, Federal Reserve, working paper 2017-034, https://www.federalreserve.gov/econres/feds/files/
2017034pap.pdf; Skander J. Van den Heuvel, The Welfare Effects of Bank Liquidity and Capital Requirements, Federal
Reserve, November 2022, https://www.federalreserve.gov/econres/feds/the-welfare-effects-of-bank-liquidity-and-
capital-requirements.htm; and BCBS, An Assessment of the Long-Term Economic Impact of Stronger Capital and
Liquidity Requirements.
64 Small banks may face disproportionately higher compliance costs, and so the benefits of simpler rules may be greater
for them.
65 Andrew G. Haldane, The Dog and the Frisbee, Speech, August 31, 2012, https://www.bis.org/review/r120905a.pdf;
and Karen Petrou, A Holistic Construct for Bank Regulatory Capital, July 6, 2022, https://fedfin.com/wp-content/
uploads/2022/07/FedFin-Issue-Brief-A-Holistic-Construct-for-Bank-Regulatory-Capital.pdf.
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trend has been the return to simpler leverage measures of capital requirements either in addition to or, in some cases, instead of prior risk-weighting schemes. For example, banks that opt in to to or, in some cases, instead of prior risk-weighting schemes. For example, banks that opt in to
the CBLR are no longer subject to risk-weighted capital requirements.the CBLR are no longer subject to risk-weighted capital requirements.6663 In cases where it replaces In cases where it replaces
risk weighting, a leverage measure is used to simplify regulatory requirements. But for many risk weighting, a leverage measure is used to simplify regulatory requirements. But for many
banks, simpler measures such as leverage ratios are intended to supplement risk-weighted banks, simpler measures such as leverage ratios are intended to supplement risk-weighted
schemes, and in doing so, they act as a hedge against any particular market risk.schemes, and in doing so, they act as a hedge against any particular market risk.
For decades, the guiding principle of capital regulation is that a riskier bank should hold more For decades, the guiding principle of capital regulation is that a riskier bank should hold more
capital. However, leverage ratios serve as a sort of regulatory hedge against the chance that capital. However, leverage ratios serve as a sort of regulatory hedge against the chance that
regulators misappropriated risk weight categories or that an unforeseen risk emerged that risk regulators misappropriated risk weight categories or that an unforeseen risk emerged that risk
weights did not properly capture and eroded capital adequacy. Further, leverage ratios act as a weights did not properly capture and eroded capital adequacy. Further, leverage ratios act as a
“"belt and suspendersbelt and suspenders”" approach to capital regulation, effectively guarding against the risk of a approach to capital regulation, effectively guarding against the risk of a
particular institution as well as the potential systemic impact a larger asset portfolio may have on particular institution as well as the potential systemic impact a larger asset portfolio may have on
the financial system should it succumb. Leverage ratios also proved to be more transparent and the financial system should it succumb. Leverage ratios also proved to be more transparent and
therefore instilled more confidence during financial crises.therefore instilled more confidence during financial crises.
When banks face multiple capital requirements, the minimum amount of capital that they are When banks face multiple capital requirements, the minimum amount of capital that they are
required to hold is determined by whichever capital requirement is the required to hold is determined by whichever capital requirement is the“binding” one.67"binding" one.64 Issues can Issues can
arise when the combination of risk-weighted ratios and leverage ratios does not result in capital arise when the combination of risk-weighted ratios and leverage ratios does not result in capital
being held against the riskiest behavior. For example, if a bankbeing held against the riskiest behavior. For example, if a bank’'s leverage requirement compels it s leverage requirement compels it
to hold more capital than its risk-weighted requirement, the size of the bank binds the bankto hold more capital than its risk-weighted requirement, the size of the bank binds the bank’s
's capital decisions rather than the riskiness of its assets. At that point, capital regulation is no longer capital decisions rather than the riskiness of its assets. At that point, capital regulation is no longer
based on the principle of matching risk with capital, and it has the potential to create perverse based on the principle of matching risk with capital, and it has the potential to create perverse
incentives for banks.incentives for banks.6865 For example, under a purely risk-based regime, if two banks had the same For example, under a purely risk-based regime, if two banks had the same
assets but one held much riskier assets than the other did, then the bank with the riskier asset assets but one held much riskier assets than the other did, then the bank with the riskier asset
portfolio would have to hold more capital. But if the leverage requirement is the binding portfolio would have to hold more capital. But if the leverage requirement is the binding
requirement, all assets require the same amount of capital (at least up to the point where they requirement, all assets require the same amount of capital (at least up to the point where they
would hold an equal amount of capital under either risk-based or leverage regimes), so there is would hold an equal amount of capital under either risk-based or leverage regimes), so there is
less incentive to hold safe assets.less incentive to hold safe assets.
In practice, this is more likely to occur for the largest institutions because they are subject to the
SLR, which on average requires a bank to hold more capital than the generally applicable
leverage ratio does. The switch to the stress capital buffer may have exacerbated this issue for
non-G-SIB large banks subject to the stress tests. The growth in balance sheet assets, particularly
among the largest institutions, over the past decade (especially during the pandemic69)—
combined with enhanced prudential standards targeting leverage capital over risk-weighted
capital—has influenced capital formation among banks, making many banks’
By creating the CBLR, Congress explicitly allowed smaller banks to choose simplicity over risk sensitivity. For non-CBLR banks, leverage ratios were also more likely to be binding, particularly among the largest institutions over the past decade. This occurred because of the growth in balance sheet assets over that period (especially during the pandemic66) and because of enhanced prudential standards—especially for the G-SIBs until the eSLR was reformed in 2025. This influenced capital formation among banks, making balance sheet size a balance sheet size a
more important determinant of more important determinant oftheirmany banks' capital position than their risk profiles. The regulators lowered the eSLR and the CBLR to make risk-based standards more likely to be the binding requirement for G-SIBs and smaller banks, respectively, while reducing capital requirements.67 Alternatively, risk-based requirements could have been raised to return them to the binding requirement without reducing the total amount of capital that banks were required to hold.
Regulatory Proposals
capital position than their risk profiles.
66 See the “Community Bank Leverage Ratio” section above.
67 The binding requirement will vary from bank to bank—and possibly over time for a given bank—depending on the
types of capital and assets it holds. Typically, a bank aims to hold enough capital to always stay comfortably above
whatever amount is required by the binding ratio. It nevertheless must take into account whichever requirement is
binding in all its actions. In reality, the binding requirement is the one that costs the bank the most to hold—for
example, if a bank’s RWA were such that it was required to hold $8 million in total capital, and its total assets were
such that it had to hold $7 million in tier 1 to meet its leverage ratio requirements. It is possible that the $7 million in
tier 1 cost the bank more to raise than the $6 million in tier 1 plus $2 million in tier 2 capital ($8 million in total) cost to
raise.
68 Karen Petrou, A Holistic Construct for Bank Regulatory Capital, July 6, 2022, https://fedfin.com/wp-content/
uploads/2022/07/FedFin-Issue-Brief-A-Holistic-Construct-for-Bank-Regulatory-Capital.pdf.
69 The regulators provided temporary relief to banks subject to the SLR during the pandemic by exempting Treasury
securities and bank reserves from the SLR. This relief expired in March 2021.
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By creating the CBLR, Congress explicitly opted for simplicity over risk sensitivity for smaller
banks. For non-CBLR banks, Congress or the regulators could lower leverage ratios to make risk-
based standards the binding requirement.70 Alternatively, risk-based requirements could be raised
to return them to the binding requirement. Some current proposals to alter capital requirements
for large banks that would reduce the likelihood of leverage requirements being binding are
discussed in the next section.
Large Bank Issues
Since post-crisis large bank capital rules were finalized beginning in 2011, there have been
various proposals to make the rules more effective (in the eyes of proponents). Although specific
proposals would often result in large banks holding less capital, in principle any proposal to
change how capital rules work could be crafted to have a neutral effect on how much capital large
banks hold overall (although some banks would hold more capital and some would hold less
under such a proposal). For example, a narrower base for measuring assets or exposures to hold
capital against could be offset by having to hold a higher percentage of capital, or vice versa.
Some prominent current proposals focus on the countercyclical capital buffer, TLAC, and the
SLR.
Should the Countercyclical Buffer Be Reformed?
According to the Bank for International Settlements, the CCYB’s primary objective is to prevent
excess credit growth that could result in financial instability by requiring banks to hold more
capital during periods of rapid credit growth. Likewise, the countercyclical buffer could be
lowered during an economic downturn so that banks would become freer to provide credit to
support a weak economy.71
Yet since the CCYB was implemented in 2013 in the United States, it has been continuously set
at zero. Over that period, the U.S. economy and financial system have experienced a sluggish
recovery, a financial boom, a brief but extreme financial freeze at the onset of the pandemic, and
another financial boom. And yet the CCYB has never been changed. Arguably, in its current state,
it does not serve its intended purpose of restraining excess credit growth and mitigating credit
downturns, unless one believes that credit growth has never been excessive in that time, which
included periods of unusually rapid price growth in multiple asset classes, including equities,
housing, and cryptocurrency.72 This could occur for multiple reasons. Perhaps the banking
regulators had not accurately identified periods of excess credit growth as they occurred in this
period, which raises the question of whether they would in the future. Or perhaps the incentives
facing the bank regulators—such as fear of public backlash or political pressure or the fear that
the act of raising the CCYB would cause a financial panic—make it too difficult to raise the
CCYB above zero.
If policymakers seek to reform the CCYB, there are multiple options. One option would be to
remove regulatory discretion from the decisionmaking process and instead base the level of the
CCYB on a formula, such as the rate of credit growth or asset price appreciation, perhaps
70 Regulators could not reduce the leverage ratio below 4% without a legislative change because the Collins
Amendment prohibits regulators from setting capital requirements below those in place in 2010.
71 BIS, Countercyclical Capital Buffer, July 6, 2022, https://www.bis.org/bcbs/ccyb/.
72 In its policy statement on the CCYB, the Fed sets a relatively high (and subjective) bar for raising the CCYB—that
excessive credit or asset price growth is threatening financial stability. Making CCYB activation contingent on
financial stability concerns makes it more likely to not be used for the reasons posited above. See 12 C.F.R. Appendix
A to Part 217.
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allowing regulators to override the formula in unusual circumstances. Another is to repeal the
CCYB, which some might justify on the grounds that it has not worked as intended and, in any
case, raising large bank capital standards is not the best way to tackle excess credit growth, even
if it had worked as intended.
Another option, proposed in 2019 by then-Fed Vice Chair Randal Quarles and others, is to make
the default level of the CCYB, say, 1% so that regulators would be reducing the CCYB in a
downturn instead of raising it during credit booms. If desired, other capital requirements could be
reduced by a similar amount to make the effect capital neutral.73 This approach could also
potentially ease capital constraints in a downturn even when the CCYB was previously at its
default level, making the CCYB truly countercyclical. This would presumably be easier for
regulators to do whether the current inactivity is because of identification or incentives. This
approach has been used in some other countries, such as the United Kingdom.
TLAC and Regional Banks
Several Category III banks, popularly called “regional banks” because they tend to be
concentrated in particular regions of the country, have applied to merge with or acquire other
relatively large banks in recent years.74 This has narrowed the size gap between G-SIBs and the
largest Category III banks, particularly in terms of their banking subsidiaries. As these Category
III banks have grown in size, some observers have questioned whether they are becoming too big
to fail (i.e., their failure is likely to cause widespread financial instability).
On October 14, 2022, the Fed and FDIC released an advanced notice of proposed rulemaking on
whether TLAC and other resolution requirements should apply to a greater set of large banks.75
The issue was also raised in the FDIC’s request for information on mergers and in a speech by
Fed Vice Chair Michael Barr.76 Acting Comptroller Michael Hsu suggested that TLAC
requirements could avoid a situation where a failing regional bank would have to be bought by
“one of the four megabanks.”77
As discussed above, TLAC is intended to avoid failing large banks from being “bailed out” by the
government and instead be “bailed in” by shareholders and bondholders. TLAC is currently
applied to G-SIBs because they are the most likely to be too big to fail. For smaller banks not
subject to TLAC, the most common form of resolution is for the FDIC to sell a failing bank’s
viable operations and assets to a healthy bank. This option is available for a failing regional bank
73 Federal Reserve Vice Chair for Supervision Randal K. Quarles, Frameworks for the Countercyclical Capital Buffer,
speech, March 29, 2019, https://www.federalreserve.gov/newsevents/speech/quarles20190329a.htm.
74 For more information, see CRS In Focus IF11956, Bank Mergers and Acquisitions, by Marc Labonte and Andrew P.
Scott.
75 Federal Reserve, “Federal Reserve Board Invites Public Comment on an Advance Notice of Proposed Rulemaking to
Enhance Regulators’ Ability to Resolve Large Banks in an Orderly Way Should They Fail,” press release, October 14,
2022, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20221014a.htm. The Federal Register notice was
released on October 24, 2022, and can be found at Federal Reserve System and FDIC, “Resolution-Related Resource
Requirements for Large Banking Organizations,” 87 Federal Register 64170, October 24, 2022.
76 FDIC, “Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding
Bank Merger Transactions,” 87 Federal Register 18740, March 31, 2022, https://www.fdic.gov/news/board-matters/
2021/2021-12-06-notational-fr.pdf; Vice Chair for Supervision Michael S. Barr, “Making the Financial System Safer
and Fairer,” speech, September 07, 2022, https://www.federalreserve.gov/newsevents/speech/barr20220907a.htm.
77 Acting Comptroller of the Currency Michael J. Hsu, “Bank Mergers and Industry Resiliency,” speech, May 9, 2022,
https://www.occ.gov/news-issuances/speeches/2022/pub-speech-2022-49.pdf.
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as well, but as Hsu suggested, a suitor able to finance and absorb such a large institution would
likely either be a G-SIB or another regional bank, which could then become a G-SIB.
If policymakers sought to extend TLAC requirements to a broader set of banks, one option would
be to apply the requirement to any bank meeting a certain criteria (e.g., Category II or III, large
U.S. IHCs of foreign banks). Another option would be to require merger applicants to meet
TLAC requirements as a condition for the approval of any merger over some threshold. Various
estimates have been made about how much long-term debt banks would be required to issue
under this proposal, although in the absence of a formal proposal, these estimates are purely
speculative.78 Alternatively, regulators can already reject specific merger applications on financial
stability grounds if they believe there is a “resolvability gap,” in the words of Hsu.79
If a bank is not too big to fail or could be easily resolved through the FDIC’s traditional
resolution process, many would argue the societal costs of TLAC requirements are likely to
outweigh the benefits. As the proposed rule notes, G-SIB resolutions are more complex because
of their significant foreign and nonbank subsidiaries. Critics also argue that bank regulators have
approved the resolution plans (“living wills”) of these banks and therefore have explicitly
endorsed the view that these banks can be resolved without being bailed out and, in some cases,
by selling parts of the business to multiple buyers.80 (However, the resolution plans do not include
mergers that have not been completed.)
SLR Relief for Safe Assets
As discussed above, regulators responded to the surge in banks’ holdings of safe assets during the
pandemic with a temporary exemption from the SLR for banks’ reserve balances held at the Fed
and their holdings of Treasury securities. Regulators allowed this exemption to expire at the end
of March 2021, by which time financial conditions had normalized. However, some regulators
have suggested that a permanent change would be desirable to address the underlying issue.
As discussed above, leverage ratios are intended to be backstops to ensure a minimum level of
capital adequacy, not a binding constraint on banks. However, according to Quarles, the rapid
increase in safe assets on bank balance sheets during the pandemic caused the SLR to
increasingly become the binding constraint for large banks (see the “Binding Requirements”
section above).81 Quarles decries the “perverse incentives” of a binding SLR to cause banks to
want to avoid adding safe assets to their balance sheets. He argues that the SLR should be
recalibrated to reflect a financial system with more Treasuries and bank reserves. That could
78 Harry Terris and Zuhaib Gull, “TLAC Requirements for Regionals Might Not Pose That Big of a Hit,” S&P Global
Market Intelligence, October 13, 2022; Lauren Anderson, Katie Collard, and Gonzalo Fernandez Dionis, Imposition of
SPOE and TLAC Requirements on Large Regional Banks Is Unnecessary to Promote Financial Stability, Bank Policy
Institute, June 30, 2022, https://bpi.com/wp-content/uploads/2022/07/Imposition-of-SPOE-and-TLAC-Requirements-
on-Large-Regional-Banks-is-Unnecessary-to-Promote-Financial-Stability.pdf; FitchRatings, “Resolution Debt Buffers
Would Drive Large US Regional Bank Upgrades,” August 16, 2022, https://www.fitchratings.com/research/banks/
resolution-debt-buffers-would-drive-large-us-regional-bank-upgrades-16-08-2022.
79 Acting Comptroller of the Currency Michael J. Hsu, “Financial Stability and Large Bank Resolvability,” speech,
April 1, 2022, https://www.occ.gov/news-issuances/speeches/2022/pub-speech-2022-33.pdf.
80 Anderson, Collard, and Dionis, Imposition of SPOE and TLAC Requirements on Large Regional Banks.
81 Federal Reserve Vice Chair for Supervision Randal K. Quarles, Between the Hither and the Farther Shore: Thoughts
on Unfinished Business, speech, December 2, 2021, https://www.federalreserve.gov/newsevents/speech/
quarles20211202a.htm. The increase in safe assets during the pandemic was the byproduct of the increase in bank
deposits. See Andrew Castro, Michele Cavallo, and Rebecca Zarutskie, Understanding Bank Deposit Growth During
the COVID-19 Pandemic, FEDS Notes, June 3, 2022, https://www.federalreserve.gov/econres/notes/feds-notes/
understanding-bank-deposit-growth-during-the-covid-19-pandemic-20220603.htm.
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allow the risk-weighted measures to again be the binding restraint, which would allow capital to
be better aligned with risk.
A potential drawback to exempting selected safe assets from the SLR is that it would no longer
play its role as a strictly risk-neutral measure of capital adequacy. Although holders of Treasury
securities do not face credit risk, they do face interest rate risk that could result in losses. It could
also lead to a “slippery slope” dynamic, where if some assets were exempted, arguments would
then be made that slightly riskier assets should also be exempted.82 Exempting assets would also
result in lower capital requirements for large banks, unless the SLR was raised to avoid that
result.
The SLR applies only to large banks, yet it functions similarly to the leverage ratio. Exempting
safe assets from the SLR but not the leverage ratio or CBLR would provide capital relief to large
banks but not small banks, even though both face the same underlying issue.
Modifying the Enhanced SLR for G-SIBs
Another option to avoid the eSLR becoming the binding capital ratio is to reduce its level. In
April 2018, the Fed and the OCC proposed a rule to modify the eSLR for G-SIBs.83 Instead of 5%
and 6% for the holding company and depository subsidiary, respectively, the rule proposes setting
the eSLR for each G-SIB at 3% plus half of its G-SIB surcharge for both the holding company
and the depository subsidiary. In this way, the amount of capital required to be held by G-SIBs
under the eSLR would increase with their systemic importance. Because each G-SIB has a
surcharge that is between 1% and 3.5%, respectively, the proposed rule would reduce capital
requirements under the eSLR for each G-SIB to between 3.5% and 4.75%, depending on the
bank. Figure 4 compares the current eSLR requirement for G-SIBs to the anticipated SLR
requirement for each G-SIB if the proposed rule were finalized.
82 Federal Reserve Governor Daniel K. Tarullo, Departing Thoughts, speech, April 4, 2017,
https://www.federalreserve.gov/newsevents/speech/tarullo20170404a.htm.
83 OCC, Federal Reserve, “Regulatory Capital Rules,” 83 Federal Register 76, April 19, 2018,
https://www.govinfo.gov/content/pkg/FR-2018-04-19/pdf/2018-08066.pdf.
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Figure 4. Enhanced SLR Requirement for G-SIBs, Current and Under Proposed Rule
If Rule Were in Effect for 12 Months Beginning October 2022
Source: CRS calculations based on Federal Reserve, Large Bank Capital Requirements, August 2022,
https://www.federalreserve.gov/publications/files/large-bank-capital-requirements-20220804.pdf.
Notes: For each G-SIB, the proposed SLR is equal to 3% plus half of the G-SIB surcharge. State = State Street, B
of NYM = Bank of New York Mel on, Wel s = Wells Fargo, B of A = Bank of America, Goldman = Goldman
Sachs, Citi = Citigroup, MS = Morgan Stanley, JPM = JPMorgan Chase, HC = Holding Company, Dep Sub =
Depository Subsidiary.
Critics are concerned that reducing the SLR would exacerbate the too big to fail problem, thereby
reducing financial stability. Whether this reduces how much capital the G-SIBs are currently
required to hold depends on whether the SLR is the binding capital ratio. As discussed above, the
SLR was not intended to be the binding ratio, yet CRS analysis found that in 2022 it was binding
for the majority of the G-SIB holding companies.
The proposed rule would make similar changes to G-SIBs’ TLAC requirement.84 Currently, G-
SIBs must meet a 9.5% leverage buffer under TLAC, composed of 5% tier 1 capital and 4.5% tier
1 capital or eligible long-term debt. Under the proposed rule, each G-SIB would be required to
meet a leverage buffer equal to 7.5% plus half of its G-SIB surcharge. Because all G-SIBs
currently have a surcharge below 4%, this would reduce their TLAC requirements. The proposed
rule would also make a similar change to the TLAC long-term debt requirement for G-SIBs.
Current Expected Credit Loss Phase-In85
Accounting practices also affect a bank’s capital levels. For example, a bank adjusts the value of
its loans to account for any expected losses. Those adjustments are called credit loss reserves
(formerly, loan loss reserves), and they affect capital levels in the short run by reducing income.
This in turn reduces retained earnings, a component of core capital.
84 OCC, Federal Reserve, “Regulatory Capital Rules.”
85 For more on Current Expected Credit Loss, see CRS Report R45339, Banking: Current Expected Credit Loss
(CECL), by Raj Gnanarajah.
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In June 2016, the Financial Accounting Standards Board, which implements U.S. accounting
standards for financial institutions, created a new way to account for expected losses at an earlier
date during the life of a loan.86 This approach, referred to as Current Expected Credit Loss
(CECL), requires banking organizations “to recognize lifetime expected credit losses and to
incorporate reasonable and supportable forecasts in developing the estimate of lifetime expected
credit losses, while also maintaining the current requirement that banking organizations consider
past events and current conditions.”87
If CECL closer aligns credit reserves and credit losses, it would tend to improve safety and
soundness. At the same time, transitioning to recognizing the full lifetime of expected credit
losses up front would likely result in a reduction of the income earned during the initial reporting
period. Thus, if a bank does not earn sufficient income to offset the increased credit loss reserves,
then retained earnings would decline. Retained earnings are part of bank’s tier 1 capital. In
February 2019, bank regulators adopted a joint final rule for an optional phase-in period of three
years so banks could mitigate the potential impact of implementing the new CECL standard.88
In March 2020, responding to the pandemic, regulators adopted a second CECL transition
provision through an interim final rule.89 This transition allowed banks that were required to
adopt CECL in 2020 to delay for up to two years an estimate of CECL’s effect on regulatory
capital, followed by a three-year transition period. (The regulators adopted a final rule in
September 2020, consistent with the interim final rule, effectively giving banks five years to fully
implement the new standard.)90
Banking regulators have acknowledged that CECL implementation will impact regulatory capital
by increasing allowance levels and lowering retained earnings, ultimately lowering common
equity tier 1 capital.91 The two-year window for banks to implement their estimates of CECL’s
impact on capital is closing and could prove an interesting test of the banking system’s capital
position.
Crypto and Capital Requirements
Currently, traditional commercial banks are relatively limited in their exposure to cryptocurrency
assets.92 However, that could change in the future if regulators allow banks to expand their
operations into crypto markets. Bank regulators recently stated that
86 For more, see Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2016-13, Financial
Instruments—Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments.
87 OCC, Federal Reserve System, and FDIC, “Regulatory Capital Rule: Implementation and Transition of the Current
Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and
Conforming Amendments to Other Regulations,” 84 Federal Register 4222-4250, February 14, 2019.
88 OCC, Federal Reserve System, and FDIC, “Regulatory Capital Rule: Implementation and Transition.”
89 OCC, Federal Reserve System, and FDIC, “Regulatory Capital Rule: Revised Transition of the Current Expected
Credit Losses Methodology for Allowances,” 85 Federal Register 17723, March 31, 2020.
90 OCC, Federal Reserve System, and FDIC, “Regulatory Capital Rule: Revised Transition.”
91 Fed, FDIC, National Credit Union Administration, and OCC, “Frequently Asked Questions on the New Accounting
Standard on Financial Instruments—Credit Losses,” December 19, 2016, p. 15, https://www.federalreserve.gov/
supervisionreg/srletters/sr1619a1.pdf.
92 For example, the OCC issued a range of interpretive guidance effectively permitting national banks to custody crypto
assets. Further, the OCC conditionally approved three national trust charters for crypto operations. Additionally, some
state regulators are approving trust and special depository charters for crypto companies. However, traditional
commercial banks are currently not allowed to accept crypto deposits.
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issuing or holding as principal crypto-assets that are issued, stored, or transferred on an
open, public, and/or decentralized network, or similar system is highly likely to be
inconsistent with safe and sound banking practices.93
Nevertheless, banks might have other permissible exposures to crypto that trigger capital
requirements. Depending on what is permitted, banks could potentially hold crypto exposures
with regulatory capital implications by, for example, accepting crypto as loan collateral, using
stablecoins, or providing certain custodial services for crypto.94 Further, as there have begun to be
trust companies and special purpose banks chartered at the state and federal levels95 that
participate in various crypto markets, regulators may want to consider how and whether
cryptocurrency exposure should be accounted for in future capital regulations. In 2022, the BCBS
issued its second consultative document on the regulatory treatment of crypto exposures,96 which
provides a potential framework for U.S. regulators down the road.
The basic structure of the proposal in the first consultation was to classify cryptocurrency into
two groups: assets that are deemed to be stable and ones that are not.97 The first group would
effectively be subject to the existing capital framework, whereas the latter would be subject to a
new, more conservative capital requirement.
The new framework refines the way crypto is classified and includes a stabilization test for
certain stablecoins, introduces a new requirement to account for risk to digital infrastructure
underpinning crypto transactions, clarifies which risks are covered by capital frameworks for
operational risk or market risk, specifies liquidity requirements, and introduces an exposure limit
of 1% of tier 1 capital for less stable cryptocurrency.
BCBS acknowledged that the value of the crypto market contracted significantly during the
months between the first and second consultation.98 However, despite the current market size, a
large exposure to crypto could undermine a bank’s safety and soundness. These risks could be
managed through capital requirements and/or other regulatory measures, including prohibiting
banks from activities that would result in crypto exposures. Before the BCBS framework is
adopted and implemented in the United States, Congress may consider which method would be
more appropriate and effective.
Basel III “Endgame”
In September 2022, the federal banking regulators announced their intention to issue a proposed
rule on “enhanced regulatory capital requirements that align with the final set of ‘Basel III’
93 Federal Reserve, FDIC, and OCC, Joint Statement on Crypto-Asset Risks to Banking Organizations, January 3, 2023,
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230103a1.pdf.
94 Board of Governors of the Federal Reserve System, FDIC, and OCC, Joint Statement on Crypto-Asset Policy Sprint
Initiative and Next Steps, November 23, 2021, https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20211123a1.pdf.
95 For more on bank charters, see CRS Report R47014, An Analysis of Bank Charters and Selected Policy Issues, by
Andrew P. Scott.
96 Moody’s Analytics, “BCBS Consults on Prudential Treatment of Cryptoasset Exposures,” June 30, 2022,
https://www.moodysanalytics.com/regulatory-news/jun-30-22-bcbs-consults-on-prudential-treatment-of-cryptoasset-
exposures.
97 Group 1 includes tokenized traditional assets and assets with effective stabilization mechanisms. Group 2 would
include assets with ineffective stabilization mechanism, thus posing higher risks compared with Group 1.
98 BCBS, “Second Consultation on the Prudential Treatment of Cryptoasset Exposures,” June 2022,
https://www.bis.org/bcbs/publ/d533.pdf.
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standards issued by the Basel Committee on Banking Supervision in December 2017.” The
regulators noted that the proposal would apply only to large banks.99 This last round of Basel III
reforms is sometimes colloquially referred to as the Basel III Endgame or Basel IV. According to
the BCBS,
A key objective of the revisions … is to reduce excessive variability of risk-weighted assets
(RWAs) … [and] help restore credibility in the calculation of RWAs by: (i) enhancing the
robustness and risk sensitivity of the standardised approaches for credit risk and operational
risk, which will facilitate the comparability of banks’ capital ratios; (ii) constraining the
use of internally-modelled approaches; and (iii) complementing the risk-weighted capital
ratio with a finalised leverage ratio and a revised and robust capital floor.100
The leverage ratio revisions include “introducing a leverage ratio buffer to further limit the
leverage of G-SIBs.”101 In the United States, an SLR buffer has already been introduced. If the
buffer is applied to the SLR, the BCBS proposal is consistent with the 2018 proposed rule
discussed in the “Modifying the Enhanced SLR for G-SIBs” section.102 The BCBS set
(nonbinding) deadlines of January 2022 to January 2027 to implement these standards.
There has already been some divergence between U.S. implementation of Basel III and the Basel
III agreements. For large banks, implementation of the endgame could result in (1) greater
divergence that could be problematic for international cooperation; (2) U.S. regulation becoming
more complex in order to simultaneously allow divergence and compliance;103 or (3) elimination
of U.S. divergence, which could result in higher or lower capital requirements, depending on the
provision.104
99 Board of Governors of the Federal Reserve System, FDIC, and OCC, “Agencies Reaffirm Commitment to Basel III
Standards,” press release, September 9, 2022, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20220909a.htm.
100 BCBS, Basel III: Finalising Post-Crisis Reforms, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
101 BCBS, High-Level Summary of Basel III Reforms, December 2017, https://www.bis.org/bcbs/publ/
d424_hlsummary.pdf.
102 The BCBS leverage buffer proposal includes off-balance-sheet items, which is consistent with the SLR. See BCBS,
Basel III: Finalising Post-Crisis Reforms, p. 143.
103 For more information, see Bank Policy Institute, “Basel Finalization: The History and Implications for Capital
Regulation—Part II,” January 31, 2023, https://bpi.com/basel-finalization-the-history-and-implications-for-capital-
regulation-part-ii/.
104 Former Fed Vice Chair Randal Quarles claimed that implementing the endgame could raise large bank capital
requirements by as much as 20%, although the actual effect on capital would depend on details that have not yet been
determined. See Quarles, Between the Hither and the Farther Shore.
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Appendix. Historical Capital Frameworks
U.S. capital standards have a long history featuring many fundamental changes in how they work, U.S. capital standards have a long history featuring many fundamental changes in how they work,
sometimes returning to approaches that had previously been discarded. Typically, financial crises sometimes returning to approaches that had previously been discarded. Typically, financial crises
create demand for new types of capital requirements in response to recent stress borne by the create demand for new types of capital requirements in response to recent stress borne by the
financial system. An example is the set of enhanced prudential standards first introduced in the financial system. An example is the set of enhanced prudential standards first introduced in the
years following the 2007-2009 financial crisis.years following the 2007-2009 financial crisis.
In the United States, capital standards for banks began as a simple minimum amount of gold or In the United States, capital standards for banks began as a simple minimum amount of gold or
silver that bank owners were required to contribute to the bank in order for it to begin operations, silver that bank owners were required to contribute to the bank in order for it to begin operations,
and when national banks were first formed in the and when national banks were first formed in the19th19th century, those formation capital century, those formation capital
requirements were based on the population of the area where the bank was headquartered.requirements were based on the population of the area where the bank was headquartered.105
102 Banks were then required to build additional capital levels referred to as Banks were then required to build additional capital levels referred to as“"surplus accountssurplus accounts”" equal equal
to 20% of their formation capital requirements. This could be drawn down as banks incurred to 20% of their formation capital requirements. This could be drawn down as banks incurred
losses, but banks were not allowed to pay dividends until the surpluses were rebuilt. In the early losses, but banks were not allowed to pay dividends until the surpluses were rebuilt. In the early
20th20th century, capital requirements were slowly modified to be based on the size of the bank century, capital requirements were slowly modified to be based on the size of the bank’s
's operations rather than the geographic area it served. For example, in 1914, the OCC implemented operations rather than the geographic area it served. For example, in 1914, the OCC implemented
a capital-to-deposits ratio for national banks, and by the 1930s, California, New York, Michigan, a capital-to-deposits ratio for national banks, and by the 1930s, California, New York, Michigan,
and Texas established capital requirements for state-chartered banks in proportion to their and Texas established capital requirements for state-chartered banks in proportion to their
deposits.deposits.106
103
When the FDIC was created in 1933, it required state-chartered banks to meet a minimum capital When the FDIC was created in 1933, it required state-chartered banks to meet a minimum capital
requirement equal to 10% of deposits.requirement equal to 10% of deposits.107104 After the FDIC began insuring deposits held at banks, After the FDIC began insuring deposits held at banks,
however, deposit withdrawals became less risky, and asset losses became the primary focus for however, deposit withdrawals became less risky, and asset losses became the primary focus for
capital regulation.capital regulation.108105 In 1939, the FDIC shifted to a 10% capital-to-assets ratio requirement. In 1939, the FDIC shifted to a 10% capital-to-assets ratio requirement.
By the 1940s, banks invested heavily in U.S. Treasuries, which increased their asset holdings but By the 1940s, banks invested heavily in U.S. Treasuries, which increased their asset holdings but
meant their holdings comprised more meant their holdings comprised more“"risk-freerisk-free”" instruments. instruments.109106 Regulators sought to Regulators sought to “"avoid avoid
penalizing banks for investing in these low-yield and penalizing banks for investing in these low-yield and‘riskless’ assets”110'riskless' assets"107 by modifying capital by modifying capital
requirements to deduct Treasury holdings from assets in the denominator of the capital-to-asset requirements to deduct Treasury holdings from assets in the denominator of the capital-to-asset
ratio calculations.ratio calculations.111108 Slowly, capital adequacy began to be defined in terms of capital held against Slowly, capital adequacy began to be defined in terms of capital held against
assets that were held for the purposes of earning a return, which were generally associated with assets that were held for the purposes of earning a return, which were generally associated with
greater risk than Treasuries and other risk-free assets.
105 The National Banking Act of 1864 sets an early example of formation capital requirements. At formation, banks
were required to establish minimum capital levels such as $50,000 for banks in cities with fewer than 6,000 people,
$100,000 for cities of fewer than 50,000 people, and $200,000 for cities of more than 50,000 people. For more, see
John Walter, “US Bank Capital Regulation: History and Changes Since the Financial Crisis,” Federal Reserve Bank of
Richmond Economic Quarterly, vol. 105, no. 1 (First Quarter 2019), https://www.richmondfed.org/-/media/
richmondfedorg/publications/research/economic_quarterly/2019/q1/walter.pdf.
106 Walter, “US Bank Capital Regulation.”
107 The average capital-to-deposits ratio from 1920 to 1939 was 15.2%, suggesting that the minimum of 10% was not
binding for many banks. See Walter, “US Bank Capital Regulation.”
108 Karlyn,Mitchell, “Capital Adequacy at Commercial Banks,” Federal Reserve Bank of Kansas City Economic
Review, September/October 1984, https://www.kansascityfed.org/documents/1049/1984-
Capital%20Adequacy%20at%20Commercial%20Banks.pdf.
109 Walter, “US Bank Capital Regulation.”
110 Malcolm Alfriend, “International Risk-Based Capital Standard: History and Explanation,” Federal Reserve Bank of
Richmond Economic Review, November/December 1988, https://www.richmondfed.org/-/media/richmondfedorg/
publications/research/economic_review/1988/pdf/er740603.pdf.
111 Mitchell, “Capital Adequacy at Commercial Banks.”
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greater risk than Treasuries and other risk-free assets.
It was not until the 1950s that asset risk became a central feature of capital regulation. By that It was not until the 1950s that asset risk became a central feature of capital regulation. By that
time, the Fed, FDIC, and OCC adopted an approach to measuring capital that established risk time, the Fed, FDIC, and OCC adopted an approach to measuring capital that established risk
categories for different types of assets and different capital requirements within each category. categories for different types of assets and different capital requirements within each category.
Regulators modified this requirement by adding a liquidity test, which required more capital for Regulators modified this requirement by adding a liquidity test, which required more capital for
less liquid institutions. Capital adequacy was largely viewed in terms of how much capital an less liquid institutions. Capital adequacy was largely viewed in terms of how much capital an
institution had versus the amount required as determined by the adjusted risk approach.institution had versus the amount required as determined by the adjusted risk approach.
However, while regulators adopted similar approaches to capital requirements, there was general However, while regulators adopted similar approaches to capital requirements, there was general
disagreement over what assets to risk adjust, and by the 1960s, the OCC abandoned the risk disagreement over what assets to risk adjust, and by the 1960s, the OCC abandoned the risk
adjustments adjustments“"on the grounds that it was arbitrary and did not consider factors such as on the grounds that it was arbitrary and did not consider factors such as
management, liquidity, asset quality, or earnings trends.management, liquidity, asset quality, or earnings trends.”112"109 Further, the three banking agencies Further, the three banking agencies
disagreed on how to define disagreed on how to define capital. The Fed continued to define it as equity plus reserves for loan . The Fed continued to define it as equity plus reserves for loan
losses, while the FDIC and OCC allowed some forms of debt to count. It was not until the 1980s losses, while the FDIC and OCC allowed some forms of debt to count. It was not until the 1980s
that the agencies began to coordinate capital requirements.that the agencies began to coordinate capital requirements.113
110
In 1981, the banking agencies coordinated a new definition of In 1981, the banking agencies coordinated a new definition of bank capital and set joint standards and set joint standards
for determining capital adequacy. The new definition comprised for determining capital adequacy. The new definition comprised“"primary capitalprimary capital”" and and
“"secondary capital.secondary capital.”" Primary capital was defined as instruments that were not subject to was defined as instruments that were not subject to
redemption or retirement, such as common stock, reserves for loan losses, and other capital redemption or retirement, such as common stock, reserves for loan losses, and other capital
reserves. reserves. Secondary capital included nonpermanent forms of equity, such as redeemable preferred included nonpermanent forms of equity, such as redeemable preferred
stock and subordinated debt. The regulators also created minimum levels of capital to determine stock and subordinated debt. The regulators also created minimum levels of capital to determine
capital adequacy for community banks and regional banks.capital adequacy for community banks and regional banks.114111 However, a federal appeals court However, a federal appeals court
ruled that regulators did not have the authority to impose cease-and-desist orders on banks with ruled that regulators did not have the authority to impose cease-and-desist orders on banks with
capital inadequacy as determined by capital ratios.capital inadequacy as determined by capital ratios.115112 In 1983, Congress passed the International In 1983, Congress passed the International
Lending Supervision Act (ILSA),Lending Supervision Act (ILSA),116113 which gave the agencies the authority to establish minimum which gave the agencies the authority to establish minimum
capital standards and authorized them to enforce these capital standards.capital standards and authorized them to enforce these capital standards.
Later in the 1980s, regulators amended the minimum requirements, establishing a simple primary Later in the 1980s, regulators amended the minimum requirements, establishing a simple primary
capital-to-asset ratio of 5.5% and total capital of 6%. Because the ratio was a simple capital-to-capital-to-asset ratio of 5.5% and total capital of 6%. Because the ratio was a simple capital-to-
asset calculation, banks began increasing their holdings of higher yielding assets, and because asset calculation, banks began increasing their holdings of higher yielding assets, and because
capital requirements applied only to balance sheet items, banks began to expand off-balance-sheet capital requirements applied only to balance sheet items, banks began to expand off-balance-sheet
activity.activity.117
114
In addition to granting authority to the agencies to establish and enforce capital standards, ILSA In addition to granting authority to the agencies to establish and enforce capital standards, ILSA
also stated that the Fed and Treasury should work with other countries to strengthen capital bases also stated that the Fed and Treasury should work with other countries to strengthen capital bases
of banks involved in international lending. This laid the groundwork for the U.S. implementation
112 Alfriend, “International Risk-Based Capital Standard.”
113 While agency coordination is not inherently good or bad (for instance, regulators could coordinate a bad policy),
industry has generally viewed disparate treatment of similar issues by the three federal banking agencies as
burdensome, confusing, or creating an un-level playing field. Typically, bank regulators coordinate rulemaking on
issues affecting all banks in some way.
114 Larger institutions, referred to as “multinational banks,” were excluded from this measurement system until 1983,
when the Fed set a minimum capital ratio of 5% for multinational banks. See Mitchell, “Capital Adequacy at
Commercial Banks.”
115 First National Bank of Bellaire v. Comptroller 1983, pp. 8-9.
116 12 U.S.C. §3901 et seq.
117 Off-balance-sheet (OBS) activity refers to the operation of assets and liabilities that are not recorded on the balance
sheet for accounting purposes. Examples of OBS assets include letters of credit, loan commitments, and transfers of
financial assets; OBS liabilities include revolving underwriting facilities, certain contingent liabilities, and standby
lines of credit. For more, see the FDIC examination manual at https://www.fdic.gov/regulations/safety/manual/
section3-8.pdf.
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of banks involved in international lending. This laid the groundwork for the U.S. implementation of what became known as the Basel Accords, a prudential framework focused on (but not limited of what became known as the Basel Accords, a prudential framework focused on (but not limited
to) capital standards issued by the BCBS, an international standard setting body (see text box).to) capital standards issued by the BCBS, an international standard setting body (see text box).
History of the Basel Committee
The Basel Committee was created in the wake of international financial market turmoil caused by the 1970 The Basel Committee was created in the wake of international financial market turmoil caused by the 1970
exchange rate crisis. After the exchange rate crisis. After thecol apsecollapse of Bretton Woods in 1973, many banks incurred large foreign currency of Bretton Woods in 1973, many banks incurred large foreign currency
losses. In response to these and other disruptions in the international financial markets, the central bank losses. In response to these and other disruptions in the international financial markets, the central bank
governors of the G-10 countries established a Committee on Banking Regulations and Supervisory Practices (later governors of the G-10 countries established a Committee on Banking Regulations and Supervisory Practices (later
renamed the Basel Committee on Banking Supervision, or BCBS) at the end of 1974 to facilitate regular renamed the Basel Committee on Banking Supervision, or BCBS) at the end of 1974 to facilitate regular
cooperation between its member countries on banking supervisory matters and to enhance financial stability.cooperation between its member countries on banking supervisory matters and to enhance financial stability.
In 1975, the BCBS issued a paper that came to be known as the In 1975, the BCBS issued a paper that came to be known as the“Concordat.”"Concordat." The Concordat set out principles The Concordat set out principles
for sharing supervisory responsibility for banksfor sharing supervisory responsibility for banks’' foreign branches, subsidiaries, and joint ventures between host foreign branches, subsidiaries, and joint ventures between host
and parent (or home) supervisory authorities. In May 1983, the Concordat was revised and re-issued as and parent (or home) supervisory authorities. In May 1983, the Concordat was revised and re-issued as Principles
for the Supervision of Banks’' Foreign Establishments..118
115 Capital adequacy soon became the main focus of the BCBSCapital adequacy soon became the main focus of the BCBS’'s activities. In the early 1980s, the onset of the Latin s activities. In the early 1980s, the onset of the Latin
American debt crisis heightened the BCBSAmerican debt crisis heightened the BCBS’'s concerns that the capital ratios of the main international banks were s concerns that the capital ratios of the main international banks were
deteriorating at a time of growing international risks. This resulted in a broad consensus on a weighted approach deteriorating at a time of growing international risks. This resulted in a broad consensus on a weighted approach
to the measurement of risk both on and off banksto the measurement of risk both on and off banks’' balance sheets. balance sheets.
According to BCBS, According to BCBS,“"there was strong recognition within the Committee of the overriding need for a there was strong recognition within the Committee of the overriding need for a
multinational accord to strengthen the stability of the international banking system and to remove a source of multinational accord to strengthen the stability of the international banking system and to remove a source of
competitive inequality arising from differences in national capital requirements.competitive inequality arising from differences in national capital requirements.” Fol owing" Following comments on a comments on a
consultative paper published in December 1987, a capital measurement system commonly referred to as the Basel consultative paper published in December 1987, a capital measurement system commonly referred to as the Basel
Capital Accord was approved by the G-10 governors and released to banks in July 1988.Capital Accord was approved by the G-10 governors and released to banks in July 1988.
As the financial system becomes more complex, regulators have updated capital requirements for As the financial system becomes more complex, regulators have updated capital requirements for
banks. Since 1988, BCBS has issued three iterative frameworks, referred to as Basel I, II, and III. banks. Since 1988, BCBS has issued three iterative frameworks, referred to as Basel I, II, and III.
While the Basel frameworks (also referred to as While the Basel frameworks (also referred to as“accords”"accords") have no legal force in the United ) have no legal force in the United
States, it is helpful to understand the BCBS approach because domestic regulators have chosen to States, it is helpful to understand the BCBS approach because domestic regulators have chosen to
closely align their rules—which are implemented through the notice-and-comment rulemaking closely align their rules—which are implemented through the notice-and-comment rulemaking
process pursuant to the Administrative Procedure Act—with these frameworks. This choice is process pursuant to the Administrative Procedure Act—with these frameworks. This choice is
arguably predictable given that members of BCBS negotiate the rules together and that U.S. bank arguably predictable given that members of BCBS negotiate the rules together and that U.S. bank
regulators are, as the representatives from the worldregulators are, as the representatives from the world’'s largest economy and financial system, s largest economy and financial system,
influential members. As such, BCBS standards likely reflect, at least in part and possibly influential members. As such, BCBS standards likely reflect, at least in part and possibly
significantly, the views and preferences of the U.S. agencies. A driving concern of the BCBS has significantly, the views and preferences of the U.S. agencies. A driving concern of the BCBS has
historically been avoiding a historically been avoiding a“"race to the bottomrace to the bottom”" in bank regulation—in particular, larger in bank regulation—in particular, larger
countries such as the United States concerned that small countries will enact lax standards to countries such as the United States concerned that small countries will enact lax standards to
entice banks to locate in their jurisdictions.entice banks to locate in their jurisdictions.
Basel I
Basel I was established in 1988 and focused mainly on credit risk, establishing a classification Basel I was established in 1988 and focused mainly on credit risk, establishing a classification
system for risk weighting bank assets. It featured five risk categories of 0%, 10%, 20%, 50%, and system for risk weighting bank assets. It featured five risk categories of 0%, 10%, 20%, 50%, and
100%. Basel I proposed minimum capital equal to 8% of RWA. Capital comprised two forms: 100%. Basel I proposed minimum capital equal to 8% of RWA. Capital comprised two forms:tier
Tier 1 capital and 1 capital andtierTier 2 capital. Tier 1 capital is the more loss absorbent type of capital and represents 2 capital. Tier 1 capital is the more loss absorbent type of capital and represents
the basic funding of the bank. Tier 2 capital is less loss absorbent.the basic funding of the bank. Tier 2 capital is less loss absorbent.
In 1989, the United States adopted Basel I and implemented a uniform regulatory capital system In 1989, the United States adopted Basel I and implemented a uniform regulatory capital system
that required banking organizations to maintain regulatory capital against exposures both on and that required banking organizations to maintain regulatory capital against exposures both on and
118 BIS, Principles for the Supervision of Banks’ Foreign Establishments (Concordat), May 28, 1983,
https://www.bis.org/publ/bcbsc312.htm.
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off balance sheet.off balance sheet.116 Exposures were assigned one of four categories of credit risk, which carried Exposures were assigned one of four categories of credit risk, which carried
minimum capital charges ranging from 0% to 8%.minimum capital charges ranging from 0% to 8%.
Signatories agreed to limit Basel I to internationally active banks. However, U.S. regulators Signatories agreed to limit Basel I to internationally active banks. However, U.S. regulators
applied the framework to all U.S. banking organizations. In the 1990s, it became apparent that applied the framework to all U.S. banking organizations. In the 1990s, it became apparent that
Basel I had some limitations, particularly for larger banks. For example, the Basel I rules required Basel I had some limitations, particularly for larger banks. For example, the Basel I rules required
the same amount of regulatory capital against all unsecured corporate loans and bonds regardless the same amount of regulatory capital against all unsecured corporate loans and bonds regardless
of actual risk and treated almost all first-lien residential mortgage exposures as equally risky. This of actual risk and treated almost all first-lien residential mortgage exposures as equally risky. This
provided an incentive for banking organizations to shed lower-risk exposures and acquire or provided an incentive for banking organizations to shed lower-risk exposures and acquire or
retain higher-risk exposures within some asset categories. The Basel I–based rules also did not retain higher-risk exposures within some asset categories. The Basel I–based rules also did not
take into account important elements of credit-risk mitigation—such as most forms of collateral, take into account important elements of credit-risk mitigation—such as most forms of collateral,
many guarantees and credit derivatives, and the maturity and seniority of exposures—and, thus, many guarantees and credit derivatives, and the maturity and seniority of exposures—and, thus,
may have blunted incentives for banks to reduce or otherwise manage risk. In addition, the Basel may have blunted incentives for banks to reduce or otherwise manage risk. In addition, the Basel
I–based rules were considered particularly inadequate for dealing with capital markets I–based rules were considered particularly inadequate for dealing with capital markets
transactions, such as repurchase agreements, securities borrowing and lending, margin loans, and transactions, such as repurchase agreements, securities borrowing and lending, margin loans, and
over-the-counter derivatives. As these examples illustrate, simple rules have limitations that over-the-counter derivatives. As these examples illustrate, simple rules have limitations that
regulators subsequently attempted to address through increasingly complex rules. In response, regulators subsequently attempted to address through increasingly complex rules. In response,
BCBS initiated a revision to the capital framework, which became Basel II.BCBS initiated a revision to the capital framework, which became Basel II.119
117 Basel II
In June 2004, BCBS introduced a more risk-sensitive capital adequacy framework, Basel II, In June 2004, BCBS introduced a more risk-sensitive capital adequacy framework, Basel II,
designed to promote improved risk measurements and to better align capital requirements with designed to promote improved risk measurements and to better align capital requirements with
risk. Basel II included three pillars: minimum regulatory capital requirements, supervisory review risk. Basel II included three pillars: minimum regulatory capital requirements, supervisory review
of capital adequacy, and market discipline through enhanced public disclosure.of capital adequacy, and market discipline through enhanced public disclosure.120
118
Under Basel II, a banking organization calculated risk-based capital requirements for exposure to Under Basel II, a banking organization calculated risk-based capital requirements for exposure to
credit risk and operational risk. For measuring credit risk, Basel II included three approaches: a credit risk and operational risk. For measuring credit risk, Basel II included three approaches: a
standardized approach, which modifies and enhances the Basel I approach, and two internal standardized approach, which modifies and enhances the Basel I approach, and two internal
ratings-based approaches—foundation and advanced—that use an institutionratings-based approaches—foundation and advanced—that use an institution’'s internal estimates s internal estimates
of key risk parameters in combination with supervisory capital formulas to determine risk-based of key risk parameters in combination with supervisory capital formulas to determine risk-based
capital requirements. Under the foundation approach, banking organizations estimated some risk capital requirements. Under the foundation approach, banking organizations estimated some risk
parameters, and supervisors set others. Under the advanced approach, banking organizations parameters, and supervisors set others. Under the advanced approach, banking organizations
determined all of the key risk parameters.determined all of the key risk parameters.
Basel II also Basel II also providesprovided three methodologies for estimating operational risk: a basic indicator three methodologies for estimating operational risk: a basic indicator
approach, a standardized approach, and an advanced measurement approach. The basic indicator approach, a standardized approach, and an advanced measurement approach. The basic indicator
approach and the standardized approach both linked operational risk capital requirements to fixed approach and the standardized approach both linked operational risk capital requirements to fixed
percentages of a banking organizationpercentages of a banking organization’'s gross income. The advanced measurement approach s gross income. The advanced measurement approach
relied on a banking organizationrelied on a banking organization’'s internal operational risk measurement and management s internal operational risk measurement and management
processes. Banking organizations with significant trading activities also factored in a measure for processes. Banking organizations with significant trading activities also factored in a measure for
exposure to market risk.exposure to market risk.
The U.S. implementation of Basel II took a few years to materialize into a form that each of the The U.S. implementation of Basel II took a few years to materialize into a form that each of the
three banking regulators agreed upon. The final rule, issued in 2007, implemented only the three banking regulators agreed upon. The final rule, issued in 2007, implemented only the
advanced internal rating approach to calculating credit risk and the advanced measurement advanced internal rating approach to calculating credit risk and the advanced measurement
119 Federal Reserve, “ANPR for Proposed Revisions to the Current Risk-Based Capital Rules,” September 30, 2005,
https://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051006/Basel1Amemo.pdf.
120 Federal Reserve, “Implementation of Advanced Capital Adequacy Framework (Basel II Draft Final Rule), October
26, 2007, https://www.federalreserve.gov/generalinfo/basel2/FinalRule_BaselII/Board_memo.pdf.
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approach to operational risk (together called the “approach to operational risk (together called the "advanced approachesadvanced approaches”).121").119 The rules The rules
implementing Basel II identified three groups: banks required to adopt the advanced approaches implementing Basel II identified three groups: banks required to adopt the advanced approaches
(“("core bankscore banks”"), banks that voluntarily adopt advanced approaches (opt-in banks), and banks that ), banks that voluntarily adopt advanced approaches (opt-in banks), and banks that
do not need to use advanced approaches (do not need to use advanced approaches (“"general banksgeneral banks”"). General banks continued to apply the ). General banks continued to apply the
standardized approach. Core banks were institutions with either consolidated total assets of $250 standardized approach. Core banks were institutions with either consolidated total assets of $250
billion or more, consolidated foreign exposures of $10 billion or more, or subsidiaries of billion or more, consolidated foreign exposures of $10 billion or more, or subsidiaries of
institutions that use the advanced approach.institutions that use the advanced approach.122120 (The rule included a provision that allowed (The rule included a provision that allowed
regulators to exclude a bank from the advanced approach for a variety of reasons.)regulators to exclude a bank from the advanced approach for a variety of reasons.)
Financial Crisis to the Present: Dodd-Frank Act and Basel III
In the years leading up to the 2007-2009 financial crisis, banks In the years leading up to the 2007-2009 financial crisis, bankswereproved after the fact to be overleveraged and overleveraged and
insufficiently liquid, which was reflected in rapid credit growth and volatile pricing of risk.insufficiently liquid, which was reflected in rapid credit growth and volatile pricing of risk.123121 The The
BCBS issued new principles for liquidity risk management in 2008,BCBS issued new principles for liquidity risk management in 2008,124122 and in 2009 it issued and in 2009 it issued
further guidance on how to strengthen the Basel II framework.further guidance on how to strengthen the Basel II framework.125123 By 2009, the financial system in By 2009, the financial system in
the United States had avoided collapse through large-scale government intervention, and the United States had avoided collapse through large-scale government intervention, and
widespread bank failures widespread bank failuresreflectedexposed the vulnerabilities in the existing capital framework. the vulnerabilities in the existing capital framework.
In 2010, Congress passed the Dodd-Frank Act (P.L. 111-203), which addressed a number of In 2010, Congress passed the Dodd-Frank Act (P.L. 111-203), which addressed a number of
vulnerabilities revealed by the financial crisis. For the most part, the Dodd-Frank Act deferred to vulnerabilities revealed by the financial crisis. For the most part, the Dodd-Frank Act deferred to
the forthcoming Basel III on reforming capital requirements, but Section 171, known as the the forthcoming Basel III on reforming capital requirements, but Section 171, known as the
Collins Amendment, required the bank regulators to establish minimum leverage and risk-based Collins Amendment, required the bank regulators to establish minimum leverage and risk-based
capital requirements, on a consolidated basis, for all insured depository institutions and capital requirements, on a consolidated basis, for all insured depository institutions and
depository institution holding companies, as well as nonbank financial companies supervised by depository institution holding companies, as well as nonbank financial companies supervised by
the Fed. This is an example of how, although the Basel Accords do not require congressional the Fed. This is an example of how, although the Basel Accords do not require congressional
approval to become U.S. regulation, Congress can nevertheless make statutory changes to capital approval to become U.S. regulation, Congress can nevertheless make statutory changes to capital
requirements, regardless of whether they are part of Basel.requirements, regardless of whether they are part of Basel.
By the end of 2010, BCBS issued new prudential standards to address problems exposed by the By the end of 2010, BCBS issued new prudential standards to address problems exposed by the
financial crisis, revising and updating the Basel II standards. These new standards, many of which financial crisis, revising and updating the Basel II standards. These new standards, many of which
were new capital requirements and some of which apply only to large banks, came to be known were new capital requirements and some of which apply only to large banks, came to be known
as Basel III and included the following:as Basel III and included the following:
Stricter requirements for the quality and quantity of capital;Stricter requirements for the quality and quantity of capital;
Additional capital buffers that restrict capital distributions if drawn down;Additional capital buffers that restrict capital distributions if drawn down;
A minimum amount of loss-absorbing capital relative to all of a bankA minimum amount of loss-absorbing capital relative to all of a bank’'s assets and s assets and
off-balance-sheet exposures regardless of risk weighting;
121 OCC, Fed, FDIC, and Office of Thrift Supervision, “Risk-Based Capital Standards: Advanced Capital Adequacy
Framework—Basel II; Final Rule,” 72 Federal Register 69288-69445, December 7, 2007, https://www.govinfo.gov/
content/pkg/FR-2007-12-07/pdf/07-5729.pdf.
122 Banks required to use advanced approaches would be redefined in 2019. See the “Advanced Approaches” section
above.
123 Alexander Chudik and Marcel Fratzscher, “Liquidity, Risk and the Global Transmission of the 2007-08 Financial
Crisis and the 2010-11 Sovereign Debt Crisis,” European Central Bank, February 2012, https://www.ecb.europa.eu/
pub/pdf/scpwps/ecbwp1416.pdf.
124 BCBS, Principles for Sound Liquidity Risk Management and Supervision, September 2008, https://www.bis.org/
publ/bcbs144.pdf.
125 BCBS, Enhancements to Basel II Framework, July 2009, https://www.bis.org/publ/bcbs157.pdf.
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off-balance-sheet exposures regardless of risk weighting;
Minimum liquidity ratios intended to ensure that banks had enough liquid assets Minimum liquidity ratios intended to ensure that banks had enough liquid assets
and stable funding to meet cash flow needs; andand stable funding to meet cash flow needs; and
Additional requirements for systemically important banks, including higher Additional requirements for systemically important banks, including higher
capital requirements than other banks and strengthened cross-border supervision capital requirements than other banks and strengthened cross-border supervision
and resolution.and resolution.
A series of narrower, more technical BCBS proposals followed. Some of the more complex A series of narrower, more technical BCBS proposals followed. Some of the more complex
details of the Basel III framework were later agreed to in 2017details of the Basel III framework were later agreed to in 2017,126 (known as the "Basel III Endgame"),124 with an implementation time with an implementation time
frame of the final measures taking place from 2023 to 2028.frame of the final measures taking place from 2023 to 2028.127
125
The United States began implementing the first round of Basel III standards in 2014 after a The United States began implementing the first round of Basel III standards in 2014 after a
couple of years of proposed rulemaking.couple of years of proposed rulemaking.128126 Regulations issued in 2014 included the Regulations issued in 2014 included the
implementation of Basel III, changes to the existing capital framework to be consistent with implementation of Basel III, changes to the existing capital framework to be consistent with
Dodd-Frank, revisions to the calculation of RWA under the Basel II standardized approach, and Dodd-Frank, revisions to the calculation of RWA under the Basel II standardized approach, and
changes to the advanced approaches risk-based capital rules. Regulators also included changes to changes to the advanced approaches risk-based capital rules. Regulators also included changes to
specific risk weights and definitions to better reflect risks that had been problematic during the specific risk weights and definitions to better reflect risks that had been problematic during the
financial crisis, such as high volatility commercial real estate (HVCRE). As a result, details of the financial crisis, such as high volatility commercial real estate (HVCRE). As a result, details of the
U.S. capital rules diverge in places from the Basel III framework, sometimes in ways that make U.S. capital rules diverge in places from the Basel III framework, sometimes in ways that make
the U.S. rules stricter.the U.S. rules stricter.129127 The implementation of each of these provisions was phased in over The implementation of each of these provisions was phased in over
several years, with most parts phased in by 2016 but some subparts being implemented in 2022. several years, with most parts phased in by 2016 but some subparts being implemented in 2022.
Some of the provisions implemented in the final rule are listed Some of the provisions implemented in the final rule are listedinin Table A-1.
Table A-1. Key Provisions of U.S. Basel III Implementation
Provision
Covered Institutions
Minimum capital ratios and buffers; regulatory Minimum capital ratios and buffers; regulatory
adjustments and deductions
All banking institutionsAll banking institutions
adjustments and deductions
Standardized approach for calculating RWAStandardized approach for calculating RWA
All banking institutions (established floor for advanced All banking institutions (established floor for advanced
approaches institutions)approaches institutions)
Advanced approaches for calculating RWAAdvanced approaches for calculating RWA
Advanced approaches institutions
RWAs for market riskRWAs for market risk
Market risk institutionsMarket risk institutions
Source: Davis Polk, Davis Polk,“"U.S. Basel III Final Rule: Visual Memorandum,U.S. Basel III Final Rule: Visual Memorandum,”" April 30, 2015, p. 7, April 30, 2015, p. 7,
https://www.davispolk.com/sites/default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdfhttps://www.davispolk.com/sites/default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdf.
. Notes: Market risk institutions have aggregate trading assets and liabilities of more than 10% of total assets or Market risk institutions have aggregate trading assets and liabilities of more than 10% of total assets or
more than $1 more than $1bil ionbillion or one that is required to calculate RWAs for market risk by a regulator. or one that is required to calculate RWAs for market risk by a regulator.
Congress modified parts of Basel III in subsequent legislation. In 2018, Congress passed the Congress modified parts of Basel III in subsequent legislation. In 2018, Congress passed the
Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174), Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174),
which reduced the number of banks subject to the large bank capital framework resulting from which reduced the number of banks subject to the large bank capital framework resulting from
the Dodd-Frank Act (discussed in the section the Dodd-Frank Act (discussed in the sectionentitled “Large Bank Enhanced Capital
126above entitled "Large Bank Enhanced Capital Framework").128 In addition, it created the CBLR, which allowed certain banks to opt in to a different, simplified capital framework (discussed in the section above entitled "Community Bank Leverage Ratio"). The current capital standards for U.S. banks are discussed in detail above. The EGRRCPA also modified specific details of certain capital rules, including those surrounding the risk weighting of HVCRE and the SLR.
1.
2.
12 U.S.C. §3907. For examples of legislative interventions, see the Appendix.
3.
4.
5.
The BCBS is described in greater detail in the Appendix.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
Anat R. Admati et al., Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive, working paper, March 23, 2011, https://gsbapps.stanford.edu/researchpapers/library/RP2065R1&86.pdf; Greg Baer and Francisco Covas, "As U.S. Regulators Implement the 2017 Basel Accord, It's Time for a Reality-Based Assessment of Current Capital Levels," Bank Policy Institute, November 10, 2022, https://bpi.com/as-u-s-regulators-implement-the-2017-basel-accord-its-time-for-a-reality-based-assessment-of-current-capital-levels/.
54.
55.
56.
57.
58.
59.
Data available at FDIC, "Bank Failures in Brief—Summary," https://www.fdic.gov/bank/historical/bank/.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
BCBS, BCBS, Basel III: Finalising Post-Crisis Reforms, December 2017, https://www.bis.org/bcbs/publ/d424.pdf, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
127 See “Basel III Endgame” section above. The original final implementation of 2022 was delayed because of COVID-
19.
128 OCC, “.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
OCC and Board of Governors of the Federal Reserve System, "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized Approach for Risk-Provisions, Prompt Corrective Action, Standardized Approach for Risk-weightedWeighted Assets, Market Discipline and Assets, Market Discipline and
Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule,Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule,”" 78 78 Federal
Register 62018, October 11, 2013 62018, October 11, 2013.
129 Davis Polk, “U.S. Basel III Final Rule: Visual Memorandum,” April 30, 2015, https://www.davispolk.com/sites/
default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdf.
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Framework”).130 In addition, it created the CBLR, which allowed certain banks to opt in to a
different, simplified capital framework (discussed in the section entitled “Community Bank
Leverage Ratio”). The current capital standards for U.S. banks are discussed in detail above. The
EGRRCPA also modified specific details of certain capital rules, including those surrounding the
risk weighting of HVCRE and the SLR.
Author Information
Andrew P. Scott
Marc Labonte
Analyst in Financial Economics
Specialist in Macroeconomic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
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copy or otherwise use copyrighted material.
130, https://www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf.
87.
88.
89.
90.
91.
92.
93.
94.
For consistency, Figure 3 shows the decline in capital at the holding company level. Many banks with less than $10 billion in assets subject to the standardized approach do not have to comply with capital requirements at the holding company level, but the regulators report that the percentage change in capital for those banks at the bank subsidiary level is similar.
95.
96.
97.
The regulators report that the Basel endgame proposal would raise CET1 by 0.9% for banks subject to the market risk framework that are not Category I or II banks. This is not shown in Figure 3.
98.
99.
100.
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105.
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114.
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128.
For more information, see CRS Report R45073, For more information, see CRS Report R45073, Economic Growth, Regulatory Relief, and Consumer Protection Act
(P.L. 115-174) and Selected Policy Issues, coordinated by David W. Perkins., coordinated by David W. Perkins.
Congressional Research Service
R47447 · VERSION 1 · NEW
41
Contents
- Introduction
- How Capital Regulation Works
- Why Have Capital Requirements?
- Current U.S. Bank Capital Framework
- Regulatory Definitions of Capital
- Risk-Weighted Assets (RWAs)
- Minimum Capital Requirements
- Prompt Corrective Action (PCA)
- Risk-Weighted Capital Requirements
- Leverage Ratios
- Community Bank Leverage Ratio (CBLR)
- Large Bank Enhanced Capital Framework
- Advanced Approaches
- Supplementary Leverage Ratio
- G-SIB Capital Surcharges
- Stress Tests, Capital Planning, and the Stress Capital Buffer
- Countercyclical Capital Buffer (CCYB)
- Total Loss Absorbing Capacity
- Dodd-Frank Emergency Requirements
- Summary of Large Bank Capital Requirements
- Summary of Risk-Weighted and Leverage Capital Requirements
- Policy Issues
- Should Capital Levels Be Higher or Lower?
- Binding Requirements
- Regulatory Proposals
- Basel III "Endgame"
- Standardized Approach
- Revisions to Risk Weights for Certain Exposures
- Treatment of Mortgage Servicing Assets (MSAs)
- New Requirements for AOCI
- G-SIB Surcharge
- Joint Effect of Recent Rules and Proposals on Required Capital
Figures
Tables
- Table 1. Regulatory Capital Components
- Table 2. Select Risk Weights for FDIC-Supervised Banks
- Table 3. Minimum Capital Requirements
- Table 4. Prompt Corrective Action (PCA) Framework
- Table 5. CBLR Framework
- Table 6. Banks Subject to EPR
- Table 7. EPR Capital-Related Requirements
- Table A-1. Key Provisions of U.S. Basel III Implementation
Appendixes
Summary
Financial regulators at the state and federal levels take a number of measures to ensure thebroader economy from losses.broader economy from losses.
be necessary and appropriatebe necessary and appropriate
details. Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation details. Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation
(FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are often modeled off international modeled off international
agreements made by the members of the Basel Committee on Banking Supervisionagreements made by the members of the Basel Committee on Banking Supervision (the most recent agreement being known as "Basel III"), which includes U.S. regulators., which includes U.S. regulators.
riskiness of the bankriskiness of the bank
the riskiness of those assetsthe riskiness of those assets. The reason regulators use RWA in addition to total assets is because some assets are inherently The reason regulators use RWA in addition to total assets is because some assets are inherently
riskier than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of riskier than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of
capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example, banks held capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example, banks held
highly rated mortgage-backed securities (MBSs) before the 2008 financial crisis in part because those assets had a higher highly rated mortgage-backed securities (MBSs) before the 2008 financial crisis in part because those assets had a higher
expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the
crisis. Thus, leverage ratios, which are based on balance sheet size rather than risk, can be thought of as a backstop to ensure crisis. Thus, leverage ratios, which are based on balance sheet size rather than risk, can be thought of as a backstop to ensure
that incentives posed by risk-weighted capital ratios do not result in a bank holding insufficient capital. However, there are that incentives posed by risk-weighted capital ratios do not result in a bank holding insufficient capital. However, there are
policy tradeoffs in using these two types of requirements. policy tradeoffs in using these two types of requirements.
greater regulatory burden. For that reason, Congress created an option for qualifying smaller banks to opt out of risk-greater regulatory burden. For that reason, Congress created an option for qualifying smaller banks to opt out of risk-
weighted requirements in 2018 when it created a simplified regime called the community bank leverage ratioweighted requirements in 2018 when it created a simplified regime called the community bank leverage ratio (CBLR). Another issue . Another issue
of increasing frequency is that leverage requirements are requiring banks to hold more capital than risk-weighted of increasing frequency is that leverage requirements are requiring banks to hold more capital than risk-weighted
requirements. This has the disadvantage, some argue, of making capital regulation no longer based on the principle of requirements. This has the disadvantage, some argue, of making capital regulation no longer based on the principle of
matching risk with capital.matching risk with capital.
The banking regulators under leadership appointed by President Trump have released a series of proposed and final rules since 2025 that would cumulatively reduce the amount of capital that banks are required to hold on net. The final rules include changes to the CBLR and the enhanced supplementary leverage ratio (eSLR). The proposed rules would change the Global Systemically Important Bank (G-SIB) surcharge, amend the existing capital framework, and implement the "Basel III Endgame." Regulators can raise or lower required capital in one of two general ways: by changing the ratio of required capital to assets or by changing how banks calculate their RWAs. The eSLR and CBLR rules reduce capital by lowering ratios, whereas the other proposals change RWA calculations.
A healthy banking industry is important to the overall economy. To that end, Congress legislates on and conducts oversight of bank regulation, including capital requirements. There is perennial congressional debate about whether capital requirements are too high or low and too simple or complex.
Introduction
Banks are typically places where consumers can safeguard their money in the form of deposits. Banks are typically places where consumers can safeguard their money in the form of deposits.Banks then use those deposits Banks then use those deposits
intermediation, and it is an important facet of economic activity. Intermediation is also inherently , and it is an important facet of economic activity. Intermediation is also inherently
risky: Sometimes borrowers default on loans. Because banks lend out a portion of the deposits risky: Sometimes borrowers default on loans. Because banks lend out a portion of the deposits
they receive, if their losses were great enough on defaulted loans, banks would be unable to honor they receive, if their losses were great enough on defaulted loans, banks would be unable to honor
deposits. Financial regulators at the state and federal levels take a number of measures designed deposits. Financial regulators at the state and federal levels take a number of measures designed
to ensure the financial health of banks, generally through what is referred to as prudential (or to ensure the financial health of banks, generally through what is referred to as prudential (or
safety and soundness) regulation—rules and standards put in place that mitigate risks associated safety and soundness) regulation—rules and standards put in place that mitigate risks associated
with banking activity. In addition, regulators conduct routine examination of bankswith banking activity. In addition, regulators conduct routine examination of banks
ensure that bank operations meet prudential standards. When banks fail to follow those rules, ensure that bank operations meet prudential standards. When banks fail to follow those rules,
regulators have enforcement powers to compel them to correct deficiencies.regulators have enforcement powers to compel them to correct deficiencies.
safe and sound manner. Capital serves as a layer of protection against losses. In doing so it safe and sound manner. Capital serves as a layer of protection against losses. In doing so it
promotes public confidence in banking institutions. Capital standards serve to provide a buffer promotes public confidence in banking institutions. Capital standards serve to provide a buffer
between losses and systemic risk, but they also constrain a bankbetween losses and systemic risk, but they also constrain a bank
asset growth. Because of this trade-off between safety and performance, Congress has perennially asset growth. Because of this trade-off between safety and performance, Congress has perennially
debated the balance between prudential standards and regulatory burden. Frequently, that debate debated the balance between prudential standards and regulatory burden. Frequently, that debate
focuses on proposals to modify capital requirements.focuses on proposals to modify capital requirements.
How Capital Regulation Works
A core practice of banks is to make loans, which are assets on the bankA core practice of banks is to make loans, which are assets on the bank
also acquire other assets such as securities and property. Banks primarily raise the funds needed also acquire other assets such as securities and property. Banks primarily raise the funds needed
to make loans by attracting deposits, a type of liability. Banks can also borrow money from to make loans by attracting deposits, a type of liability. Banks can also borrow money from
creditors (e.g., by issuing debt), which is another type of liability. However, banks must hold creditors (e.g., by issuing debt), which is another type of liability. However, banks must hold
more assets than liabilities in order to remain solvent, so they also raise funds from another more assets than liabilities in order to remain solvent, so they also raise funds from another
source, referred to as capital. Conceptually, a banksource, referred to as capital. Conceptually, a bank
the ownersthe owners
complex and includes various other instruments, but owner equity is the primary type of complex and includes various other instruments, but owner equity is the primary type of
regulatory capital.) The value of a bankregulatory capital.) The value of a bank
and the value of its liabilities. By setting capital requirements, regulators compel banks to acquire and the value of its liabilities. By setting capital requirements, regulators compel banks to acquire
at least a certain amount of funding from this source.at least a certain amount of funding from this source.
do not pay their loans back, and the value of the loan to the bank falls. On the bankdo not pay their loans back, and the value of the loan to the bank falls. On the bank
sheet, as these loans default, the value of the banksheet, as these loans default, the value of the bank
loans. The bank can remain solvent because the initial losses are balanced by reducing the bankloans. The bank can remain solvent because the initial losses are balanced by reducing the bank
's capital value. For example, if a bankcapital value. For example, if a bank
can use those past earnings to pay off debts when the proceeds from their assets are insufficient. can use those past earnings to pay off debts when the proceeds from their assets are insufficient.
From a cash flow perspective, if a bank becomes unable to both pay all of its creditors and make From a cash flow perspective, if a bank becomes unable to both pay all of its creditors and make
dividend payments to stockholders, debts are repaid first (generally, creditors are legally required dividend payments to stockholders, debts are repaid first (generally, creditors are legally required
to be repaid before stockholders collect dividendsto be repaid before stockholders collect dividends, and dividend payments are not mandatory), increasing the possibility of the bank ), increasing the possibility of the bank
remaining solvent. In this manner, capital acts as a buffer for losses.remaining solvent. In this manner, capital acts as a buffer for losses.
Why Have Capital Requirements? Regulators require banks to hold capital to reduce the likelihood of bank failures, which can Regulators require banks to hold capital to reduce the likelihood of bank failures, which can
negatively affect the local and broader economy, and to avoid widespread bank failures because negatively affect the local and broader economy, and to avoid widespread bank failures because
of the systemic risk that they pose to financial stability, as occurred during the Great Depression. of the systemic risk that they pose to financial stability, as occurred during the Great Depression.
To avoid those outcomes, the federal government provides a financial safety net to protect insured To avoid those outcomes, the federal government provides a financial safety net to protect insured
depositors and the broader economy from bank failures. The government safety net comes in two depositors and the broader economy from bank failures. The government safety net comes in two
separate forms: Deposit insurance is provided by the Federal Deposit Insurance Corporation separate forms: Deposit insurance is provided by the Federal Deposit Insurance Corporation
(FDIC) to protect depositors from any loss (up to the insurance limit) in the event of a bank (FDIC) to protect depositors from any loss (up to the insurance limit) in the event of a bank
failure, and the Federal Reserve (Fed) acts as a lender of last resort, extending short-term credit to failure, and the Federal Reserve (Fed) acts as a lender of last resort, extending short-term credit to
banks that are unable to access funding in private markets. These measures aim to ensure that banks that are unable to access funding in private markets. These measures aim to ensure that
banks remain liquid during periods of economic stress and reduce the likelihood that a liquidity banks remain liquid during periods of economic stress and reduce the likelihood that a liquidity
crisis becomes a solvency problem. crisis becomes a solvency problem.
with ad hoc, emergency assistance in past crises, such as the 2008 financial crisis.with ad hoc, emergency assistance in past crises, such as the 2008 financial crisis.
losses, providing a layer of protection before a potential public intervention may occur. Capital losses, providing a layer of protection before a potential public intervention may occur. Capital
allows an institution to continue operating through periods of foreseeable losses without reaching allows an institution to continue operating through periods of foreseeable losses without reaching
insolvency, ensuring that the initial risk of loss is borne by owners rather than the public safety insolvency, ensuring that the initial risk of loss is borne by owners rather than the public safety
net. Thus, capital requirements contribute to the safety of the banking system, with significant net. Thus, capital requirements contribute to the safety of the banking system, with significant
consequences for taxpayers, the broader financial system, and the economy.consequences for taxpayers, the broader financial system, and the economy.
Current U.S. Bank Capital Framework
Capital requirements are statutorily mandated, and statute provides the regulators with discretion Capital requirements are statutorily mandated, and statute provides the regulators with discretion
to set them as to set them as
intervened legislatively to modify specific rules or details.intervened legislatively to modify specific rules or details.
regulation by the federal bank regulators—the FDIC, the Fed, and the Office of the Comptroller regulation by the federal bank regulators—the FDIC, the Fed, and the Office of the Comptroller
of the Currency (OCC). The OCC is the primary federal regulator for nationally chartered banks, of the Currency (OCC). The OCC is the primary federal regulator for nationally chartered banks,
the Fed for state-chartered banks that become members of the Federal Reserve System, and the the Fed for state-chartered banks that become members of the Federal Reserve System, and the
FDIC for the remaining state-chartered banks.FDIC for the remaining state-chartered banks.
establish is consistent among establish is consistent among
standard-setting body called the Basel Committee on Banking Supervision (BCBS), although standard-setting body called the Basel Committee on Banking Supervision (BCBS), although
details sometimes diverge between domestic regulation and Basel agreements.details sometimes diverge between domestic regulation and Basel agreements.5
the latter of which was intended to address weaknesses in capital rules that were exposed by the the latter of which was intended to address weaknesses in capital rules that were exposed by the
2007-2009 financial crisis. (2007-2009 financial crisis. (See the Appendix for more information on historical capital frameworks for more information on historical capital frameworks
they take losses, they have an adequate buffer against insolvency. In addition, larger banks are they take losses, they have an adequate buffer against insolvency. In addition, larger banks are
required to meet enhanced prudential standards that include higher capital ratios to mitigate required to meet enhanced prudential standards that include higher capital ratios to mitigate
systemic risk. As discussed in more detail below, capital requirements are expressed as ratios systemic risk. As discussed in more detail below, capital requirements are expressed as ratios
where the numerator is capital and the denominator is assets. There are two broad categories of where the numerator is capital and the denominator is assets. There are two broad categories of
requirements—risk-weighted requirements, where the size of the denominator is based on the requirements—risk-weighted requirements, where the size of the denominator is based on the
riskiness of a bankriskiness of a bank
denominator.denominator.
federal banking regulators. The next section provides details on the basic capital standards that all federal banking regulators. The next section provides details on the basic capital standards that all
banks are required to meet—first, how the numerator (capital) is defined; next, how the banks are required to meet—first, how the numerator (capital) is defined; next, how the
denominator (assets) is calculated; and, finally, an overview of the various numerical ratios that denominator (assets) is calculated; and, finally, an overview of the various numerical ratios that
banks must meet. Then the subsequent section discusses the additional standards that larger banks must meet. Then the subsequent section discusses the additional standards that larger
institutions must meet.institutions must meet.
Regulatory Definitions of Capital
There are three core capital components that make up banksThere are three core capital components that make up banks
1. Banks use each component to meet various regulatory capital requirements. Each component Banks use each component to meet various regulatory capital requirements. Each component
as listed below is progressively less able to absorb losses.as listed below is progressively less able to absorb losses.
Capital Component
Summary of Capital Elements
Common Equity Tier 1 capital
earnings; accumulated other comprehensive income; earnings; accumulated other comprehensive income;
issued and held in trust for the benefit of employees as issued and held in trust for the benefit of employees as
part of an employee stock ownershippart of an employee stock ownership
no maturity or planned incentives to redeem, which are no maturity or planned incentives to redeem, which are
subordinated to depositorssubordinated to depositors
Tier 2 capital
to depositors with a minimum maturity of five yearsto depositors with a minimum maturity of five years
Source: 12 C.F.R. Chapter III, Subchapter B, 12 C.F.R. Chapter III, Subchapter B,
capital:capital:
losses, because a bank faces no obligation to repay it and can write down its losses, because a bank faces no obligation to repay it and can write down its
value in the event of losses. The FDICvalue in the event of losses. The FDIC
Policies defines CET1 as Policies defines CET1 as
treasury stock; retained earnings; certain accumulated other comprehensive treasury stock; retained earnings; certain accumulated other comprehensive
income (AOCI) elements ifincome (AOCI) elements if
electionelection, plus or minus regulatory deductions or adjustments as appropriate; and plus or minus regulatory deductions or adjustments as appropriate; and
qualifying common equity tier 1 minority interests.qualifying common equity tier 1 minority interests.
common voting shares.common voting shares.6 2.
Lending Fund or Troubled Asset Relief Program that previously qualified for Lending Fund or Troubled Asset Relief Program that previously qualified for
Tier 1 capital, and qualifying 1 capital, and qualifying
investments in other unconsolidated financial institutionsinvestments in other unconsolidated financial institutions
otherwise qualify as additional otherwise qualify as additional
assetsassets (RWAs), qualifying preferred stock, subordinated debt, and qualifying , qualifying preferred stock, subordinated debt, and qualifying
any deductions in the any deductions in the
Risk-Weighted Assets
(RWAs) As discussed below, banking regulators establish a number of capital ratios that determine how As discussed below, banking regulators establish a number of capital ratios that determine how
much capital an institution must hold to remain adequately capitalized. Many capital ratios are much capital an institution must hold to remain adequately capitalized. Many capital ratios are
calculated as a percentage of total calculated as a percentage of total
instead of just assets is because some assets are inherently riskier than others. For example, if a instead of just assets is because some assets are inherently riskier than others. For example, if a
bank holds bank holds
potential losses. However, if a bank holds a loan portfolio of subprime mortgages, that is potential losses. However, if a bank holds a loan portfolio of subprime mortgages, that is
relatively higher risk. To account for these differences in risk profiles, regulators require banks to relatively higher risk. To account for these differences in risk profiles, regulators require banks to
hold more capital against assets with greater relative risk. Assets are grouped into risk categories hold more capital against assets with greater relative risk. Assets are grouped into risk categories
and assigned a risk weight, which determines how much capital a bank must hold against and assigned a risk weight, which determines how much capital a bank must hold against
exposure. Risk weights (e.g., 20%) are not the amount of capital required. Rather, they are the exposure. Risk weights (e.g., 20%) are not the amount of capital required. Rather, they are the
percentage of percentage of
if a bank faces a capital requirement of 6% and holds $100 of assets with a risk weight of 20%, if a bank faces a capital requirement of 6% and holds $100 of assets with a risk weight of 20%,
the bank must hold $1.20 (6% x 20% x $100) of capital for those assets.the bank must hold $1.20 (6% x 20% x $100) of capital for those assets.
Table 2. Select Risk Weights for FDIC-Supervised Banks
Risk Weight
Examples of Assets
0%
are unconditionally guaranteed by the U.S. governmentare unconditionally guaranteed by the U.S. government
20%
government; to the GSEs (e.g., Fannie Mae and Freddie Mac) that is not government; to the GSEs (e.g., Fannie Mae and Freddie Mac) that is not
equity exposure or preferred stock; to U.S. depository institutionsequity exposure or preferred stock; to U.S. depository institutions
50%
not cancellednot cancelled
100%
150%
previous five years, loans that are more than 90 days past due that are not previous five years, loans that are more than 90 days past due that are not
guaranteed or are unsecured Source: 12 C.F.R. §324.32.12 C.F.R. §324.32.
Notes: This is not an exhaustive list and is used simply to This is not an exhaustive list and is used simply to
differently with respect to capital requirements.differently with respect to capital requirements.
the the standardized approach. The . The advanced approach is required for only the nine largest, most is required for only the nine largest, most
complex institutions, although other banks may voluntarily adopt it. The standardized approach is complex institutions, although other banks may voluntarily adopt it. The standardized approach is
a simpler calculation that banks can use to account for their exposures to risk, while the advanced a simpler calculation that banks can use to account for their exposures to risk, while the advanced
approach is more complex, using enhanced methodologies for calculating risk exposures. For approach is more complex, using enhanced methodologies for calculating risk exposures. For
more information, see the more information, see the
section below entitled "Advanced Approaches." Minimum Capital Requirements
There are several capital requirements, which will be explained in greater detail below, that banks There are several capital requirements, which will be explained in greater detail below, that banks
must comply with. Banks meet these various requirements simultaneously, as opposed to must comply with. Banks meet these various requirements simultaneously, as opposed to
additively, with the exception of buffers, which are on top of the minimum requirements. In other additively, with the exception of buffers, which are on top of the minimum requirements. In other
words, banks do not need to hold separate amounts of capital to comply with multiple words, banks do not need to hold separate amounts of capital to comply with multiple
which are referred to as the which are referred to as the
that a bank would need to comply with. However, some qualifying banks have opted out of the that a bank would need to comply with. However, some qualifying banks have opted out of the
generally applicable framework and instead comply with the community bank leverage ratiogenerally applicable framework and instead comply with the community bank leverage ratio
addition, large banks are subject to a series of requirements in addition to the generally applicable addition, large banks are subject to a series of requirements in addition to the generally applicable
framework.framework.
9 Table 3. Minimum Capital Requirements
Capital Ratio
Calculation
Generally Applicable Framework
Capital Conservation Buffer*
CET1/RWA
Leverage
deductions)deductions)
Other Measures
Notes: The calculation of The calculation of
numerical requirement is the same for both methods. See text for definitions and which banks each requirement numerical requirement is the same for both methods. See text for definitions and which banks each requirement
stress capital buffer, the countercyclical capital buffer, the stress capital buffer, the countercyclical capital buffer, the Global Systemically Important Bank (G-SIB)
measures.measures.
enforce capital rules on banks. The ruling argued that capital weakness alone, as measured by enforce capital rules on banks. The ruling argued that capital weakness alone, as measured by
capital ratios, was not a sufficient justification to impose a cease-and-desist order on a bank.capital ratios, was not a sufficient justification to impose a cease-and-desist order on a bank.
November 1983, Congress responded to this court ruling by granting clear authority over bank November 1983, Congress responded to this court ruling by granting clear authority over bank
capital levels to the federal banking supervisors in the International Lending Supervision Act of capital levels to the federal banking supervisors in the International Lending Supervision Act of
1983 (12 U.S.C. §3901).1983 (12 U.S.C. §3901).
banks to take actions to improve their safety and soundness. Capital requirements trigger the banks to take actions to improve their safety and soundness. Capital requirements trigger the
consistent application of remedial actions through the prompt corrective action consistent application of remedial actions through the prompt corrective action (PCA) framework.framework.
Prompt Corrective Action
(PCA)
authority to establish criteria for which regulators would take certain remedial actions based on authority to establish criteria for which regulators would take certain remedial actions based on
the capital positions of each institution. This rules-based enforcement scheme is referred to as the capital positions of each institution. This rules-based enforcement scheme is referred to as
intervening swiftly when a bank becomes undercapitalized and before it loses more money. The intervening swiftly when a bank becomes undercapitalized and before it loses more money. The
general PCA framework is summarized ingeneral PCA framework is summarized in Table 4. The minimum requirements are set equal to The minimum requirements are set equal to
the adequately capitalized PCA requirements.the adequately capitalized PCA requirements.
Table 4. Prompt Corrective Action (PCA) Framework
PCA Category
Capital Ratio Tier 1 Risk-Based
Capital Ratio Common Equity
Ratio
Leverage Ratio
Capitalized
Undercapitalized
< 8.0% or
< 6.0% or
< 4.5% or
< 4.0%.
Significantly Undercapitalized
< 6.0% or
< 4.0% or
< 3.0% or
< 3.0%.
Critically Undercapitalized
n/a
n/a
n/a
assets ≤ 2.0%.*assets ≤ 2.0%.*
Actions: Prompt Corrective Action,Actions: Prompt Corrective Action,
ch-05.pdfch-05.pdf
. Notes: CBLR institutions that meet a leverage ratio greater than CBLR institutions that meet a leverage ratio greater than
table, certain actions issued by the FDIC would prevent a bank from being considered well capitalized. A bank table, certain actions issued by the FDIC would prevent a bank from being considered well capitalized. A bank
subsidiary of a Global Systemically Important Bank (G-SIB) is deemed well capitalized if it meets the above subsidiary of a Global Systemically Important Bank (G-SIB) is deemed well capitalized if it meets the above
criteria and has a supplementary leverage ratio criteria and has a supplementary leverage ratio
has a supplementary leverage ratio < 3.0%.has a supplementary leverage ratio < 3.0%.
* Tangible equity is * Tangible equity is
surplus) not included in surplus) not included in
order to restore its capital levels. Institutions that are adequately capitalized or better are not order to restore its capital levels. Institutions that are adequately capitalized or better are not
subject to supervisory action regarding their capital positions.subject to supervisory action regarding their capital positions.
undercapitalized, significantly undercapitalized, or critically undercapitalized is subject to the undercapitalized, significantly undercapitalized, or critically undercapitalized is subject to the
following provisions, according to the FDIC:following provisions, according to the FDIC:
13 and undercapitalized banks may not accept brokered deposits.and undercapitalized banks may not accept brokered deposits.
undercapitalized institutions face additional provisions, which can include recapitalization undercapitalized institutions face additional provisions, which can include recapitalization
through sale of voting shares, transaction restrictions, and interest rate restrictions paid on through sale of voting shares, transaction restrictions, and interest rate restrictions paid on
deposits. Critically undercapitalized institutions are further prohibited from engaging in certain deposits. Critically undercapitalized institutions are further prohibited from engaging in certain
transactions, amending their bylaws or charters, and making excessive bonuses or compensation. transactions, amending their bylaws or charters, and making excessive bonuses or compensation.
A critically undercapitalized bank may ultimately be taken into FDIC resolution, where it is likely A critically undercapitalized bank may ultimately be taken into FDIC resolution, where it is likely
to be liquidated or sold to a healthier institution.to be liquidated or sold to a healthier institution.15
Risk-Weighted Capital Requirements
There are separate risk-weighted requirements for the three different types of capital. Because There are separate risk-weighted requirements for the three different types of capital. Because
CET1 is more loss absorbent than other CET1 is more loss absorbent than other
banks are required to hold at least 4.5% common equity, 6% of banks are required to hold at least 4.5% common equity, 6% of
capital to be considered capital to be considered
the more loss absorbent types of capital count toward meeting the less stringent requirements. In the more loss absorbent types of capital count toward meeting the less stringent requirements. In
other words, the 4.5% of CET1 also counts toward the other words, the 4.5% of CET1 also counts toward the
other other
Alternatively, a bank could hold 8% CET1 and meet all three requirements.Alternatively, a bank could hold 8% CET1 and meet all three requirements.
CET1 equal to at least 2.5% to avoid any restrictions on capital distributions (e.g., dividends and CET1 equal to at least 2.5% to avoid any restrictions on capital distributions (e.g., dividends and
share buybacks).share buybacks).
capital distributions, and if the CCB falls to 0.625% or lower, all capital distributions are capital distributions, and if the CCB falls to 0.625% or lower, all capital distributions are
prohibited. The purpose of the buffer, as the name would suggest, is to ensure that banks have prohibited. The purpose of the buffer, as the name would suggest, is to ensure that banks have
enough of a capital buffer in good times that they do not fall below their minimum requirements enough of a capital buffer in good times that they do not fall below their minimum requirements
during an economic downturn. If banks fell below their minimum requirements in a downturn, during an economic downturn. If banks fell below their minimum requirements in a downturn,
they could be forced to suddenly cut back on lending, exacerbating the downturn.they could be forced to suddenly cut back on lending, exacerbating the downturn.
Leverage Ratios
The leverage ratio is the ratio of The leverage ratio is the ratio of
Unlike other regulatory capital ratios, assets are not risk-weighted for purposes of the leverage Unlike other regulatory capital ratios, assets are not risk-weighted for purposes of the leverage
ratio. The rule implementing Basel III raised the minimum leverage ratio from 3% to 4% for ratio. The rule implementing Basel III raised the minimum leverage ratio from 3% to 4% for
certain banks, including those with a strong supervisory rating.certain banks, including those with a strong supervisory rating.
supervisory rating were already required to maintain a 4% leverage ratio.) In other words, the supervisory rating were already required to maintain a 4% leverage ratio.) In other words, the
value of the bankvalue of the bank
be considered adequately capitalized. The bank must maintain a leverage ratio of at least 5% to be be considered adequately capitalized. The bank must maintain a leverage ratio of at least 5% to be
considered well capitalized, however.considered well capitalized, however.
ratios in terms of RWA to account for the fact that some assets are riskier than others. A basic ratios in terms of RWA to account for the fact that some assets are riskier than others. A basic
tenet of finance is that riskier assets have a higher tenet of finance is that riskier assets have a higher expected rate of return in order to compensate rate of return in order to compensate
the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold
riskier assets, as the same amount of capital must be held against riskier and safer assets. But risk riskier assets, as the same amount of capital must be held against riskier and safer assets. But risk
weights may prove inaccurate. For example, banks held highly rated mortgage-backed securities weights may prove inaccurate. For example, banks held highly rated mortgage-backed securities
(MBSs) before the 2008 financial crisis, in part because those assets had a higher expected rate of (MBSs) before the 2008 financial crisis, in part because those assets had a higher expected rate of
return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses
during the crisis. Thus, the leverage ratio can be thought of as a backstop to ensure that incentives during the crisis. Thus, the leverage ratio can be thought of as a backstop to ensure that incentives
posed by risk-weighted capital ratios to minimize capital and maximize risk within a risk weight posed by risk-weighted capital ratios to minimize capital and maximize risk within a risk weight
do not result in a bank holding insufficient capital.do not result in a bank holding insufficient capital.
the public does not have full information on the risk weight assigned to each asset held by the the public does not have full information on the risk weight assigned to each asset held by the
bank. Therefore, the public can less easily assess whether a bank has enough capital to absorb bank. Therefore, the public can less easily assess whether a bank has enough capital to absorb
potential losses based on risk-weighted ratios. Some policymakers concluded after the 2008 potential losses based on risk-weighted ratios. Some policymakers concluded after the 2008
financial crisis that boosting simpler, more transparent measures of capital can be better at financial crisis that boosting simpler, more transparent measures of capital can be better at
restoring confidence during a crisis.restoring confidence during a crisis.18
Community Bank Leverage Ratio (CBLR)19
(EGRRCPA; P.L. 115-174). Section 201 of this law mandated that banks with less than $10 (EGRRCPA; P.L. 115-174). Section 201 of this law mandated that banks with less than $10
billion in consolidated assets that meet certain criteria be given the option by regulators to comply billion in consolidated assets that meet certain criteria be given the option by regulators to comply
with a higher leverage ratio instead of having to calculate the various capital requirements, with a higher leverage ratio instead of having to calculate the various capital requirements,
including the more complex risk weights noted above. This made capital rules for smaller including the more complex risk weights noted above. This made capital rules for smaller
institutions tailored to simplify the requirements based on the notion that these institutions pose institutions tailored to simplify the requirements based on the notion that these institutions pose
less risk to financial stability and the FDICless risk to financial stability and the FDIC
complex regulations poses a relatively greater regulatory burden for them. In 2019, the federal complex regulations poses a relatively greater regulatory burden for them. In 2019, the federal
banking agencies jointly issued a final rule that simplified the measure of capital adequacy for banking agencies jointly issued a final rule that simplified the measure of capital adequacy for
qualifying community banking organizations (qualifying criteria are summarized qualifying community banking organizations (qualifying criteria are summarized
opt in, thereby implementing Section 201 of the EGRRCPA. The rule became effective at the opt in, thereby implementing Section 201 of the EGRRCPA. The rule became effective at the
beginning of 2020. Section 201 granted the bank regulators authority to set the ratio requirement, beginning of 2020. Section 201 granted the bank regulators authority to set the ratio requirement,
so long as it was between 8% and 10%. The regulators settled on 9% in their so long as it was between 8% and 10%. The regulators settled on 9% in their 2019 final rule.20
In 2026, the regulators finalized a rule to lower the CBLR to a minimum of 8%. The new rule also expanded the grace period that allows banks to remain noncompliant before they must revert to the generally applicable framework, now up to four quarters, with a maximum of eight quarters every five years. As of June 2025, the final rule states that just under half of the roughly 3,600 eligible depository institutions have adopted the CBLR framework.21 The rule suggests that the revision from 9% to 8% would expand the number of banks eligible for the CBLR framework by around 500.
Table 5. CBLR Framework|
Component |
Criteria |
|
Qualifying community bank |
|
|
Calculation of leverage ratio |
Tier 1 capital/average total consolidated assets |
|
Leverage ratio requirement |
Greater than 8% |
Source: Office of the Comptroller of the Currency et al., "Regulatory Capital Rule: Community Bank Leverage Ratio Framework," 91 Federal Register 22973, April 29, 2026.
the concept that the failure of large financial firms can trigger financial instability, which in the concept that the failure of large financial firms can trigger financial instability, which in
several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the
2010 Dodd-Frank Wall Street Reform and Consumer Protection Act2010 Dodd-Frank Wall Street Reform and Consumer Protection Act
203) response to addressing financial stability and too big to fail is a new enhanced prudential 203) response to addressing financial stability and too big to fail is a new enhanced prudential
regulatory (EPR) regime that applies to large banks and to nonbank financial institutions regulatory (EPR) regime that applies to large banks and to nonbank financial institutions
designated by the Financial Stability Oversight Council (FSOC) as systemically important designated by the Financial Stability Oversight Council (FSOC) as systemically important
financial institutions (SIFIs). (There are currently no designated SIFIs.financial institutions (SIFIs). (There are currently no designated SIFIs.
foreign banks with more than $50 billion in assets to EPR. In 2018, foreign banks with more than $50 billion in assets to EPR. In 2018,
with assets between $50 billion and $100 billion with assets between $50 billion and $100 billion
regulation. The Fed has discretion to apply most individual EPR provisions to banks with regulation. The Fed has discretion to apply most individual EPR provisions to banks with
between $100 billion and $250 billion in assets between $100 billion and $250 billion in assets
basis if it would promote financial stability or the institutionsbasis if it would promote financial stability or the institutions
has proposed exempting them from several EPR requirements.has proposed exempting them from several EPR requirements.
more stringent requirements at each tier.more stringent requirements at each tier.
thresholds found in P.L. 115-174, along with other metrics, to define Category III and IV banks. thresholds found in P.L. 115-174, along with other metrics, to define Category III and IV banks.
Table 6 summarizes the definition of each category and the number of U.S. banks in each summarizes the definition of each category and the number of U.S. banks in each
category as of 2021. The 2019 rule requires foreign banks with over $50 billion in U.S. non-category as of 2021. The 2019 rule requires foreign banks with over $50 billion in U.S. non-
branch assets and $250 billion in global assets to form intermediate holding companies (IHCs) to branch assets and $250 billion in global assets to form intermediate holding companies (IHCs) to
house certain U.S. operations. Those IHCs are also placed in the four categories, and the number house certain U.S. operations. Those IHCs are also placed in the four categories, and the number
in each is shown in each is shown
As of 2025: Fourth Quarter
Criteria
# of U.S. Banks
# of IHCsa
Category I
U.S. G-SIBs
8
0
Category II
Other banks with > $700 billion in assets or > $75 billion in cross-jurisdictional activity
1
0
Category III
wholesale funding, or off-balance-sheet exposurewholesale funding, or off-balance-sheet exposure
6
7
9
3
https://www.federalreserve.gov/publications/https://www.federalreserve.gov/publications/
data-sources-terms.htm. Notes: G-SIBG-SIB
requirements to large U.S. banks and IHCs that are more stringent than those applied to smaller requirements to large U.S. banks and IHCs that are more stringent than those applied to smaller
banks. Category I, banks. Category I,
SIBs) by the Financial Stability Board, are subject to the most stringent EPR requirements.SIBs) by the Financial Stability Board, are subject to the most stringent EPR requirements.
of these capital requirements originate from Basel III rather than the Dodd-Frank Act. These of these capital requirements originate from Basel III rather than the Dodd-Frank Act. These
capital requirements determine how the largest banks must fund all of their activities on a day-to-capital requirements determine how the largest banks must fund all of their activities on a day-to-
day basis. In that sense, these requirements arguably have a larger ongoing impact on banksday basis. In that sense, these requirements arguably have a larger ongoing impact on banks
' marginal costs of providing credit and other services than most of the other EPR provisions that marginal costs of providing credit and other services than most of the other EPR provisions that
impose only fixed compliance costs on banks.impose only fixed compliance costs on banks.
Enhanced Prudential Regulation of Large Banks, by Marc Labonte., by Marc Labonte.
Advanced Approaches
technical, complex procedures—to model risk for more sophisticated financial activities. technical, complex procedures—to model risk for more sophisticated financial activities.
Previously, advanced approaches were required for institutions that had consolidated total assets Previously, advanced approaches were required for institutions that had consolidated total assets
equal to $250 billion or more or consolidated total on-balanceequal to $250 billion or more or consolidated total on-balance
$10 billion or more. In the 2019 tiering rule, the Fed changed this so that only Category I and II $10 billion or more. In the 2019 tiering rule, the Fed changed this so that only Category I and II
banks are required to use advanced approaches. Other banks may still elect to use advanced banks are required to use advanced approaches. Other banks may still elect to use advanced
approaches if they wish.approaches if they wish.26
comply with capital rules than those used by smaller banks. For example, another rule in 2019 comply with capital rules than those used by smaller banks. For example, another rule in 2019
simplified the capital treatment of certain assets to reduce regulatory burden. Advanced simplified the capital treatment of certain assets to reduce regulatory burden. Advanced
approaches banks were not allowed to use this simplified capital treatment.approaches banks were not allowed to use this simplified capital treatment.
for advanced approaches banks. Other banks were given a one-time opportunity to opt out of this for advanced approaches banks. Other banks were given a one-time opportunity to opt out of this
requirement.requirement.
Supplementary Leverage Ratio
and III banks, and any other bank that elects to be an advanced approaches bank must meet a 3% and III banks, and any other bank that elects to be an advanced approaches bank must meet a 3%
SLR at the holding company level and at the depository subsidiary level to be considered SLR at the holding company level and at the depository subsidiary level to be considered
adequately capitalized. In addition, adequately capitalized. In addition, as a result of a final rule issued in 2025, G-SIBs must also meet an enhanced SLR (eSLR) of 3% plus 50% of the G-SIB's Method 1 capital surcharge at the holding company level.28 For 2025, G-SIBs face a Method 1 surcharge that varied by bank from 1% to 2.5%, so the eSLR at the holding company level would vary from 3.5% to 4.25%.29 For the depository subsidiaries, the eSLR is 3% plus 50% of the G-SIB's Method 1 capital surcharge but can be no more than 4% overall.30 This is a reduction from the previous requirement that G-SIBs meet an eSLR of
holding company level (specifically, G-SIBs must meet a 2% buffer on top of the 3% SLR holding company level (specifically, G-SIBs must meet a 2% buffer on top of the 3% SLR
requirement) to avoid restrictions on discretionary bonuses and capital distributions and 6% at the requirement) to avoid restrictions on discretionary bonuses and capital distributions and 6% at the
depository subsidiary level to be considered well capitalized.depository subsidiary level to be considered well capitalized.
denominator.denominator.32 The difference between the leverage ratio and the SLR is that the SLR includes off- The difference between the leverage ratio and the SLR is that the SLR includes off-
balance-sheet exposures in the denominator. Thus, the numerator is the same, but the denominator balance-sheet exposures in the denominator. Thus, the numerator is the same, but the denominator
is larger.is larger.
balance-sheet losses that are not captured in the leverage ratio. Unanticipated losses related to balance-sheet losses that are not captured in the leverage ratio. Unanticipated losses related to
opaque off-balance-sheet exposures exacerbated uncertainty about banksopaque off-balance-sheet exposures exacerbated uncertainty about banks
2007-2009 financial crisis. According to the regulators, there is less need to subject small banks 2007-2009 financial crisis. According to the regulators, there is less need to subject small banks
to the SLR because small banks on average have fewer off-balance-sheet exposures.to the SLR because small banks on average have fewer off-balance-sheet exposures.
As will be discussed below, one of the overarching policy debates surrounding capital requirements is whether regulators should adjust leverage requirements so that they are not predominantly the binding requirement banks face. According to the bank regulators, before it was reduced, the eSLR was the binding constraint for five of the eight holding companies and eight of the nine major bank subsidiaries34 of the G-SIBs in 2024. Bank regulators argued that the rule would "help ensure that the enhanced supplementary leverage ratio standards serve as a backstop to risk-based capital requirements rather than a frequently binding constraint, thus reducing potential disincentives for GSIBs ... to participate in low-risk, low-return activities,"35 such as Treasury market making.36 Improved market making could make Treasury markets less fragile, which has been a focus of policymakers for several years.37 The six largest Treasury dealers are owned by G-SIBs.38 Under the rule, the regulators estimate that the eSLR will no longer be binding for all G-SIBs with primary dealer subsidiaries. The rule is closer to international Basel standards, removing what critics call U.S. "gold plating" from the eSLR. (However, the international Basel standard did not include a cap, so the U.S. standard is now lower.39) Against these benefits, lower capital requirements could also make the G-SIBs more likely to fail and cause financial instability.
G-SIB Capital Surcharges Basel III also required G-SIBs to hold relatively more capital for their risk-weighted requirements Basel III also required G-SIBs to hold relatively more capital for their risk-weighted requirementsthan other banks in the form of a common equity surcharge of at least 1% to than other banks in the form of a common equity surcharge of at least 1% to
risks that they pose to the financial system.risks that they pose to the financial system.
phasing in this capital surcharge in 2016.phasing in this capital surcharge in 2016.
based on a formula intended to reflect its systemic importance.based on a formula intended to reflect its systemic importance. Under the rule, the capital Under the rule, the capital
surcharge can be between 1% and 4.5%. The Fed stated that under its rule, most G-SIBs would surcharge can be between 1% and 4.5%. The Fed stated that under its rule, most G-SIBs would
face a higher capital surcharge than required by Basel III. For face a higher capital surcharge than required by Basel III. For
1% and 1% and
42 Stress Tests, Capital Planning, and the Stress Capital Buffer
stress capital bufferstress capital buffer (SCB)—policies that work together to ensure that large banks have enough capital to —policies that work together to ensure that large banks have enough capital to
survive a crisis. Title I of the Dodd-Frank Act required (1) company-run stress tests for any (bank survive a crisis. Title I of the Dodd-Frank Act required (1) company-run stress tests for any (bank
or nonbank) financial firm with more than $10 billion in assets, which P.L. 115-174 raised to or nonbank) financial firm with more than $10 billion in assets, which P.L. 115-174 raised to
more than $250 billion in assets (with Fed discretion to apply to financial firms with between more than $250 billion in assets (with Fed discretion to apply to financial firms with between
$100 billion and $250 billion in assets); and (2) Fed-run (or $100 billion and $250 billion in assets); and (2) Fed-run (or
BHC or nonbank SIFI with more than $50 billion in assets, which P.L. 115-174 raised to more BHC or nonbank SIFI with more than $50 billion in assets, which P.L. 115-174 raised to more
than $100 billion in assets.than $100 billion in assets.
deterioration in economic and financial conditions to determine whether banks would remain deterioration in economic and financial conditions to determine whether banks would remain
solvent in a future crisis. Unlike general capital requirements that are based on current asset solvent in a future crisis. Unlike general capital requirements that are based on current asset
values, stress tests incorporate an adverse scenario that focuses on values, stress tests incorporate an adverse scenario that focuses on
specific areas of concern each year. For example, in specific areas of concern each year. For example, in
submit a capital plan to the Fed annually. The capital plan must include a projection of the submit a capital plan to the Fed annually. The capital plan must include a projection of the
expected uses and sources of capital, including planned debt or equity issuance and dividend expected uses and sources of capital, including planned debt or equity issuance and dividend
these banks to hold more capital than other banks when regulators believe that financial these banks to hold more capital than other banks when regulators believe that financial
conditions make the risk of losses abnormally high. In normal times, the countercyclical buffer is conditions make the risk of losses abnormally high. In normal times, the countercyclical buffer is
has always been set at zero since inception.has always been set at zero since inception.
Total Loss Absorbing Capacity
requirement for U.S. G-SIBs and U.S. operations of foreign G-SIBs effective at the beginning of requirement for U.S. G-SIBs and U.S. operations of foreign G-SIBs effective at the beginning of
2019.2019.
unweighted assets (including off-balance-sheet exposures) at the holding company level. TLAC is unweighted assets (including off-balance-sheet exposures) at the holding company level. TLAC is
composed of composed of
plus 50% of the Method 1 G-SIB surcharge of unweighted assets including off-balance-sheet exposures or 6% plus the G-SIB surcharge of of unweighted assets including off-balance-sheet exposures or 6% plus the G-SIB surcharge of
RWA) issued by the holding company.RWA) issued by the holding company.
counts toward the TLAC requirement up to the eligible limit.) In addition, G-SIBs counts toward the TLAC requirement up to the eligible limit.) In addition, G-SIBs
are subject to a TLAC buffer.subject to a TLAC buffer.50 If TLAC fell below the buffer level, the G-SIB would face restrictions If TLAC fell below the buffer level, the G-SIB would face restrictions
on capital distributions and discretionary bonuses. TLAC requirements do not require banks to on capital distributions and discretionary bonuses. TLAC requirements do not require banks to
hold more capital but rather can be met through additional capital or eligible long-term debt.hold more capital but rather can be met through additional capital or eligible long-term debt.
equity and converting debt to equity in the event of the firmequity and converting debt to equity in the event of the firm
bank bank
firms.firms.
Dodd-Frank Emergency Requirements
of 15-to-1 on the bankof 15-to-1 on the bank
ratio, although this definition differs from the leverage ratio that applies to all banks).ratio, although this definition differs from the leverage ratio that applies to all banks).
is applied only if a bank receives written warning from FSOC that it poses a is applied only if a bank receives written warning from FSOC that it poses a
financial stability,financial stability,
this provision has never been triggered.this provision has never been triggered.
reduce the probability that a bank with more than $250 billion in assets experiencing financial reduce the probability that a bank with more than $250 billion in assets experiencing financial
distress will fail. Early remediation is the principle that financial problems at banks should be distress will fail. Early remediation is the principle that financial problems at banks should be
to date has not been finalized.to date has not been finalized.
52 Summary of Large Bank Capital Requirements
Table 7 summarizes the applicability of the EPR requirements discussed in this section of the summarizes the applicability of the EPR requirements discussed in this section of the
report.report.
Table 7. EPR Capital-Related Requirements
Requirement
Category I (G-SIBs)
Category II (> $700B assets or see notes)
Category III (> $250B or see notes)
Category IV (other $100B-$250B)
annual
annual
biannual
none
Fed-run stress tests
annual
annual
annual
biannual
Capital plan
annual
annual
annual
annual
Emergency 15-to-1 debt-to-equity ratio
applies
applies
applies
none
Stress capital buffer
applies
applies
applies
applies
SLR
more stringent eSLR applies
applies
applies
not required
Advanced approaches
applies
applies
not required
not required
Countercyclical capital buffer
applies
applies
applies
none
Total loss absorbency capacity
applies
none
none
none
G-SIB capital surcharge
applies
none
none
none
Source: CRS.
Notes: SLR = supplementary leverage ratio, eSLR = enhanced supplementary leverage ratioSystemically Important Bank. Banks under $700 Systemically Important Bank. Banks under $700
more than $75 more than $75
For brevity, this table does not specify whether each requirement is applied to a foreign bankFor brevity, this table does not specify whether each requirement is applied to a foreign bank
holding company or total U.S. operations.holding company or total U.S. operations.
Summary of Risk-Weighted and Leverage Capital Requirements
The basic capital requirements discussed in this report are summarized The basic capital requirements discussed in this report are summarized
weighted requirementsweighted requirements and Figure
Figure 1. Adequate Risk-Weighted Prompt Corrective ActionRequirements and Buffers
Source: CRS based on bank regulatory capital rules.
Notes: B = billion; CCB = capital conservation buffer; G-SIB = Global Systemically Important Bank; SCB = stress capital buffer. Banks can use Common Equity Tier 1 (CET1) capital to meet other Tier 1 requirements and any Tier 1 capital to meet Tier 2 requirements. See text for definitions. Regulators have set the countercyclical capital bufferabove zero. For capital requirements for above zero. For capital requirements for
2.
Figure
Source: CRS based on bank regulatory capital rules.CRS based on bank regulatory capital rules.
Notes:
B = billion; CBLR = community bank leverage ratio; dep sub = depository subsidiary; G-SIB = Global Systemically Important Bank; SLR = supplementary leverage ratio. Holding company (HC) requirement is a required buffer, not a prompt corrective action requirement. See text for other definitions. Policy Issues Since the Basel process began, there has been debate over (1) whether capital requirements should be set higher or lower and (2) what role leverage requirements should play compared to risk-weighted requirements. Should Capital Levels Be Higher or Lower? Banks often complain that capital requirements are too high, whereas their critics argue that they Banks often complain that capital requirements are too high, whereas their critics argue that they
are not high enough.are not high enough.
straightforward question to answer. As a thought experiment, if leverage requirements were set at straightforward question to answer. As a thought experiment, if leverage requirements were set at
100%, no bank would ever fail. But since capital is a more expensive funding source than debt or 100%, no bank would ever fail. But since capital is a more expensive funding source than debt or
deposits, some argue this would lead to banks providing too little credit and deposits, some argue this would lead to banks providing too little credit and
activity moving outside the banking system.activity moving outside the banking system.
concern once outside the banking system would be another factor to consider in setting capital concern once outside the banking system would be another factor to consider in setting capital
requirementsrequirements, as many nonbank financial firms do not face comparable capital requirements.) as many nonbank financial firms do not face comparable capital requirements.)
Theoretically, capital requirements could be designed to achieve the goals of safety and Theoretically, capital requirements could be designed to achieve the goals of safety and
soundness and financial stability with the least distortion in specific economic activities. They soundness and financial stability with the least distortion in specific economic activities. They
would be set high enough that, along with other prudential requirements, bank failures would not would be set high enough that, along with other prudential requirements, bank failures would not
be frequent enough to cause systemic risk (which imposes economic costs) or require taxpayer be frequent enough to cause systemic risk (which imposes economic costs) or require taxpayer
support.support.
societal costs associated with reduced credit intermediation.societal costs associated with reduced credit intermediation.
and depositors might be expected to independently gravitate to well-capitalized banks, as such and depositors might be expected to independently gravitate to well-capitalized banks, as such
banks maximize the chance that their obligations would be honored, in which case regulatory banks maximize the chance that their obligations would be honored, in which case regulatory
requirements could be viewed as redundant. But in the presence of the taxpayer safety net, these requirements could be viewed as redundant. But in the presence of the taxpayer safety net, these
incentives are blunted. incentives are blunted. For example, insured depositors face limited risk that they will suffer losses if their bank fails. Further, because an individual bank (or its creditor) does not price in how Further, because an individual bank (or its creditor) does not price in how
thus some argue capital requirements would be necessary to achieve a socially optimal outcome.thus some argue capital requirements would be necessary to achieve a socially optimal outcome.
recessions and rises when credit losses decline in booms), so capital adequacy is not meaningfully recessions and rises when credit losses decline in booms), so capital adequacy is not meaningfully
tested until a downturn, and it is tested for resiliency against financial instability even less tested until a downturn, and it is tested for resiliency against financial instability even less
frequently.frequently.
requirements were too low (or at least overall prudential regulation was not strict enough) before requirements were too low (or at least overall prudential regulation was not strict enough) before
requirements are too high, too low, or about right would need to be modeled based on theory and requirements are too high, too low, or about right would need to be modeled based on theory and
underlying assumptions about the societal costs and benefits associated with capital requirements. underlying assumptions about the societal costs and benefits associated with capital requirements.
Studies have reached different conclusions about optimal capital levels because they rely on Studies have reached different conclusions about optimal capital levels because they rely on
different theory and underlying assumptions.different theory and underlying assumptions.
complex. Over time, capital requirements have become more complex and sophisticated as the complex. Over time, capital requirements have become more complex and sophisticated as the
business of banking has become more complex and more sophisticated analytical tools have been business of banking has become more complex and more sophisticated analytical tools have been
developed to model risk. Yet simple rules have lower compliance costs,developed to model risk. Yet simple rules have lower compliance costs,
argue that simple rules are more resilient in the face of economic uncertainty.argue that simple rules are more resilient in the face of economic uncertainty.
is accurate, it improves efficiency by accurately matching capital to risk, but if inaccurate, it is accurate, it improves efficiency by accurately matching capital to risk, but if inaccurate, it
reduces efficiency by drawing too much bank funding to activities with artificially low risk reduces efficiency by drawing too much bank funding to activities with artificially low risk
weights and too little to activities with artificially high risk weights. Artificially low risk weights weights and too little to activities with artificially high risk weights. Artificially low risk weights
on MBS and other securitized products encouraging banks to hold those products in the run up to on MBS and other securitized products encouraging banks to hold those products in the run up to
the financial crisis is an example of how capital requirements can backfire and contribute to the the financial crisis is an example of how capital requirements can backfire and contribute to the
financial instability that they are intended to prevent. Because risks are frequently not revealed financial instability that they are intended to prevent. Because risks are frequently not revealed
until downturns, these inaccuracies could be in place for several years before they become until downturns, these inaccuracies could be in place for several years before they become
obvious.obvious.
Binding Requirements
Over the past several decades, capital regulations have evolved to account for more complex risks Over the past several decades, capital regulations have evolved to account for more complex risks
in the marketplace. For example, capital requirements were once based on city population, then in the marketplace. For example, capital requirements were once based on city population, then
deposit volume, then total assets, and now deposit volume, then total assets, and now
the CBLR are no longer subject to risk-weighted capital requirements.the CBLR are no longer subject to risk-weighted capital requirements.
risk weighting, a leverage measure is used to simplify regulatory requirements. But for many risk weighting, a leverage measure is used to simplify regulatory requirements. But for many
banks, simpler measures such as leverage ratios are intended to supplement risk-weighted banks, simpler measures such as leverage ratios are intended to supplement risk-weighted
schemes, and in doing so, they act as a hedge against any particular market risk.schemes, and in doing so, they act as a hedge against any particular market risk.
capital. However, leverage ratios serve as a sort of regulatory hedge against the chance that capital. However, leverage ratios serve as a sort of regulatory hedge against the chance that
regulators misappropriated risk weight categories or that an unforeseen risk emerged that risk regulators misappropriated risk weight categories or that an unforeseen risk emerged that risk
weights did not properly capture and eroded capital adequacy. Further, leverage ratios act as a weights did not properly capture and eroded capital adequacy. Further, leverage ratios act as a
particular institution as well as the potential systemic impact a larger asset portfolio may have on particular institution as well as the potential systemic impact a larger asset portfolio may have on
the financial system should it succumb. Leverage ratios also proved to be more transparent and the financial system should it succumb. Leverage ratios also proved to be more transparent and
therefore instilled more confidence during financial crises.therefore instilled more confidence during financial crises.
required to hold is determined by whichever capital requirement is the required to hold is determined by whichever capital requirement is the
arise when the combination of risk-weighted ratios and leverage ratios does not result in capital arise when the combination of risk-weighted ratios and leverage ratios does not result in capital
being held against the riskiest behavior. For example, if a bankbeing held against the riskiest behavior. For example, if a bank
to hold more capital than its risk-weighted requirement, the size of the bank binds the bankto hold more capital than its risk-weighted requirement, the size of the bank binds the bank
's capital decisions rather than the riskiness of its assets. At that point, capital regulation is no longer capital decisions rather than the riskiness of its assets. At that point, capital regulation is no longer
based on the principle of matching risk with capital, and it has the potential to create perverse based on the principle of matching risk with capital, and it has the potential to create perverse
incentives for banks.incentives for banks.
assets but one held much riskier assets than the other did, then the bank with the riskier asset assets but one held much riskier assets than the other did, then the bank with the riskier asset
portfolio would have to hold more capital. But if the leverage requirement is the binding portfolio would have to hold more capital. But if the leverage requirement is the binding
requirement, all assets require the same amount of capital (at least up to the point where they requirement, all assets require the same amount of capital (at least up to the point where they
would hold an equal amount of capital under either risk-based or leverage regimes), so there is would hold an equal amount of capital under either risk-based or leverage regimes), so there is
less incentive to hold safe assets.less incentive to hold safe assets.
more important determinant of more important determinant of
New leadership at the bank regulators appointed by President Trump has proposed a series of rules modifying capital requirements.68 This section reviews three proposed rules, issued by the bank regulators on the same day in March 2026, that would alter capital requirements. It does not include proposed rules issued under previous leadership that were never finalized.
Basel III "Endgame" In December 2017, the BCBS issued a last round of Basel III reforms that is sometimes colloquially referred to as the "Basel III Endgame." According to the BCBS, A key objective of the revisions … is to reduce excessive variability of risk-weighted assets (RWAs) … [and] help restore credibility in the calculation of RWAs by: (i) enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks' capital ratios; (ii) constraining the use of internally-modelled approaches; and (iii) complementing the risk-weighted capital ratio with a finalised leverage ratio and a revised and robust capital floor.69The federal banking regulators issued a joint proposal to implement the Endgame changes in July 2023 for banks with $100 billion or more in assets, along with certain other changes in response to issues that arose when three large banks failed in 2023.70 The 2023 proposal was opposed by trade groups and some Members of Congress.71 Reportedly, negotiations among regulators in 2024 did not yield consensus across agencies on a revised proposal, and the rule was not finalized under previous leadership.72
In 2026, the 2023 proposal was rescinded and a new Endgame proposal was issued under new agency leadership appointed by President Trump. The proposal is described as generally consistent with the BCBS document but differs "where appropriate ... to reflect specific characteristics" of the U.S. financial and legal system. According to the regulators, the proposal would "improve the regulatory capital framework for covered banking organizations by enhancing its risk sensitivity and consistency, as well as by simplifying core components of its design."73
The 2026 proposal made substantial changes to the 2023 proposal. Both proposals would replace the advanced approaches, which apply to Category I and II banks, with an expanded risk-based approach. The 2023 proposal would have extended the new framework to Category III and Category IV banks, as well as IHCs, whereas the 2026 proposal would apply only to Category I and II banks (and any bank that voluntarily choose to adopt it).
The 2026 proposal would eliminate the requirement that Category I and II banks measure their required capital under two methods, the standardized approach and advanced approaches. It would revise methodologies for measuring operational risk, securitization activity, market risk, credit risk, and equity risk.74 In other words, it largely addresses the capital markets activities of banks, not traditional lending activities. The proposal reduces the use of banks' internal models to calculate risk but retains internal models for market risk. The market risk portion of the rule would also apply to any bank with significant trading activity.
For Category I and II banks, the 2026 proposal would increase required CET1 by 1.2% at the holding company level, whereas the 2023 proposal would have increased required CET1 by 19% at the holding company level. Although the 2026 Endgame proposal would increase required capital, when taken together with the various capital rules proposed and finalized since 2025, the net impact would decrease required capital (see the section below entitled "Joint Effect of Recent Rules and Proposals on Required Capital"). The 2026 Endgame proposal would also decrease the amount of capital held by the depository subsidiaries of Category I and II Banks, which means that those banks could shift capital from the subsidiary to the holding company. It does not mean that they could reduce how much capital they hold overall because required capital is higher at the holding company level. As long as the Fed's "source of strength" requirements75 work as intended—which some are skeptical of76—shifting capital from the subsidiary to the holding company does not increase the likelihood of failure.
Standardized ApproachIn March 2026, on the same day as the new Endgame proposal was released, the bank regulators issued a "standardized approach" proposal that would apply to all banks except (1) Category I or II banks or (2) banks that opt into the CBLR.77 The proposal would both change specific risk weights and what counts toward a bank's capital. There are three general elements in the standardized approach proposal: (1) revised risk-based capital treatment of certain exposures, (2) modified definition of regulatory capital for mortgage servicing assets (MSAs), and (3) new requirements for Category III and IV banks with respect to AOCI. For the banks subject to the proposal, the first two elements would cause required capital to decline by 6.4% to 7.9% (depending on the category of bank), not including the proposed changes to the treatment of AOCI. The changes to AOCI would have the effect of increasing required capital by 2.6% for Category III and IV banks.78
Revisions to Risk Weights for Certain ExposuresThe proposal amends parts of the current standardized capital rule for determining RWAs. The proposal would change the risk weights for residential mortgage exposures, corporate exposures, and certain exposures considered as "other assets."
While the definition of a residential mortgage exposure would remain unchanged,79 the proposal would create a range of risk weights for eligible residential mortgage exposures based on loan-to-value (LTV) ratios.80 The risk weights assigned to each exposure would depend on the LTV of the mortgage exposure and whether or not the mortgage is dependent on the cash flows of the real estate, and, on average, risk weights would be lower if they are not dependent on the cash flows of the real estate.81
For corporate exposures,82 risk weights would be reduced from 100% to 95%. Further, the risk weight applicable to all assets considered "other assets" would be reduced from 100% to 90%.
Treatment of Mortgage Servicing Assets (MSAs)MSAs are a source of revenue for a bank as it retains the right to service a mortgage and collect fees for doing so. That right to collect fees is recorded as an asset on the bank's balance sheet. The current capital rule allows banks to include MSAs in their calculation of capital; however, when calculating CET1 capital, covered banking organizations must deduct amounts of MSAs that exceed 25% of their total CET1. Under the proposal, covered banking organizations would no longer be required to deduct any amount of MSAs from CET1 capital. Instead, MSAs would be subject to a 250% risk weight, consistent with the treatment in the current capital rule for MSAs that do not exceed the deduction threshold. This change would effectively make it more attractive for banks to retain MSAs by giving them more favorable capital treatment.83
New Requirements for AOCI Under the standardized proposal, Category III and IV banks (see Table 6) would have to include most parts of an accounting category called AOCI in CET1 capital, which would align capital rules with the treatment of AOCI under generally accepted accounting principles. A notable component of AOCI to be included is unrealized capital gains and losses on AFS debt securities (e.g., corporate and government bonds).84 Doing so would have the effect of increasing a bank's CET1 levels when it had unrealized capital gains and reducing CET1 when it had losses.In 2012, the original Basel III proposal would have applied the AOCI requirement to all banks (and BHCs). The regulators argued that "unrealized losses could materially affect a banking organization's capital position … and associated risks should be reflected in its capital ratios."85 Facing criticism from banks that this treatment would cause capital levels to be too volatile, the version of the rule finalized in 2013 applied the requirement only to advanced approach banks—at the time, banks with at least $250 billion in assets or $10 billion in on-balance-sheet foreign exposure. All other banks could permanently elect to opt out of this requirement.86 Doing so is sometimes referred to as the "AOCI filter."
In its 2019 regulation implementing EGRRCPA, the Fed reduced the number of banks subject to various EPR requirements, including limiting the AOCI requirement to only the nine Category I and II banks.87 The 2023 Endgame proposal would have extended the AOCI requirement to any U.S. bank, BHC, or IHC with over $100 billion in assets, similar to the 2026 standardized proposal.
The market value of securities held by banks fluctuates over time in response to changing interest rates, default risk, and so on. For banks that do not include AOCI, changes in market value are not reflected on their balance sheets. Unrealized losses on AFS securities have become a growing policy concern because they have exceeded $98 billion for all banks since 2022, mainly as a result of the general increase in interest rates. In the 15 years before then, banks had unrealized gains or small losses.88 Unrealized losses on securities played a major role in the failure of Silicon Valley Bank (SVB).89 At the end of 2022, SVB had $1.9 billion in AFS losses that would have been recognized in capital under AOCI, although most of SVB's securities were classified as held to maturity (HTM) as opposed to AFS and so would not have been affected by the proposal.90 SVB had over $100 billion in assets but was not a Category I or II bank, so it did not include AOCI in its capital levels but would have if the new proposal were in place.91
The proposed rule is limited in mitigating the risk posed by unrealized losses in two ways. First, it applies only to large banks. Second, it does not apply to securities classified as HTM.
G-SIB SurchargeIn 2023, on the same day as the Endgame proposal was released, the Fed proposed a rule to make changes to how the G-SIB surcharge is calculated.92 This proposal was never finalized.
In March 2026, on the same day as the new Endgame proposal was released, the Fed rescinded the 2023 G-SIB surcharge proposed rule and issued a new one modifying how the surcharge is calculated.93 The new proposal makes several technical changes to the way that the surcharge is calculated, which would result in G-SIBs having a lower surcharge and thus having lower effective capital requirements than under the current methodology. For example, it reduces the weight of short-term wholesale funding in calculating the score, thereby reducing effective surcharges.
Currently, a bank's surcharge changes by 0.5 percentage point increments. This creates "cliff effects," where a bank faces significantly higher capital requirements when its score jumps to the next level. The proposal would also reduce the incremental surcharges from every 0.5 percentage points to every 0.1 percentage points so that changes in a bank's score lead to smaller changes in the surcharge. In addition, surcharges are currently a "point-in-time" measure based on end-of-year data. This gives banks an incentive to engage in balance sheet "window dressing" on the last day of the year to lower their scores. The proposal would change the measurement from year-end data to average data to reduce this tendency.
The 2023 and 2026 proposals included some similar changes, such as changing from point-in-time data to average data to calculate surcharges and reducing cliff effects. However, certain other changes in the 2026 proposal that tend to reduce the average surcharge were not included in the 2023 proposal. As a result, the Fed estimated that the 2023 proposal would have increased the average surcharge by 0.13 percentage points and required capital by $13 billion (as of 2022), whereas the 2026 proposal would reduce the average surcharge by 0.4 percentage points and reduce required capital by $23 billion or 10% (as of 2024).
Joint Effect of Recent Rules and Proposals on Required CapitalFigure 3 illustrates how much required capital across a bank's holding company would decline on average for each category of bank if the recent proposed and final rules discussed above went into effect unchanged (relative to the requirements previously in place in November 2025). As mentioned above, the regulators estimate that the cumulative effect of these rules would be to reduce required Tier 1 capital by 6% for Category I and II banks, 5.6% for Category III and IV banks, 7.9% for banks with $10 billion to $100 billion in assets, and 7.4% for banks with less than $10 billion in assets that are not subject to the CBLR,94 as explained in more detail below.95 These are static estimates—if banks shift to activities with lowered risk weights in response to regulatory changes, the decline in capital could be greater. These estimates are also averages for the cohort—required capital will decline by more than average for some banks and less than average for others.Figure 3. Cumulative Projected Effect of Recent Rules on Required Tier 1 Capital for Bank Holding Companies Sources: Regulators' analysis in the proposed rules: Comptroller of the Currency et al., "Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets," 91 Federal Register 15367, March 27, 2026; Comptroller of the Currency et al., "Regulatory Capital Rule: Category I and II Banking Organizations, Banking Organizations with Significant Trading Activity, and Optional Adoption for Other Banking Organizations," 91 Federal Register 15101, March 27, 2026, https://www.federalregister.gov/documents/2026/03/27/2026-05959/regulatory-capital-rule-category-i-and-ii-banking-organizations-banking-organizations-with. Notes: B = billion; G-SIB = Global Systemically Important Bank; eSLR = enhanced supplementary leverage ratio. Effects of the Endgame re-proposal on banks that are not in Category I or II are not shown. The accumulated other comprehensive income (AOCI) proposal was published in the standardized approach proposal. Banks under the community bank leverage ratio (CBLR) are not included in the figure, and the figure does not include capital relief provided for those banks under the final rule reducing the CBLR. For bank categories, see Table 6.
For Category I and II banks, the Basel III Endgame re-proposal96 is projected to require banks to hold 1.6% more capital.97 (This is less than the 2023 Basel Endgame proposal, which would have also applied to Category III and IV banks and would have increased required capital by 9% for Category I-IV banks.) However, three other recent rules (the final rule reducing the eSLR,98 proposed changes to stress tests methodology that would effectively reduce stress test losses and thus the stress capital buffer, and the G-SIB surcharge proposal99) would more than offset this increase in required capital, leading to a net decrease in required capital of 6%.
Category III and IV banks would be required, under the standardized approach proposal, to include most parts of AOCI in capital,100 which would have the effect of increasing required capital by 2.6%. This increase is more than offset by the decrease in required capital from the rest of the standardized proposal and the proposed stress test changes, leading to a net decrease in required capital of 5.6% for Category III and IV banks. Banks with less than $100 billion but more than $10 billion in assets are subject only to the standardized approach proposal. Qualifying banks with less than $10 billion can choose between the CBLR, in which case their required capital is reduced by the recent CBLR final rule, and risk-weighted capital requirements, in which case they are subject to the standardized proposal. The recent CBLR rule also reduces required capital, but the regulators did not provide an estimate of the percentage reduction. For the banks subject to it, the largest source of decline in required capital (6.4% to 7.9%, depending on the group) is attributable to the standardized proposal, not including its changes to the treatment of AOCI. If the proposed rules are finalized with modifications, it could cause the change in required capital shown in Figure 3 to be higher or lower. In their comment letters, banks have generally called for modifications that would lead to a larger decline in capital than the proposals.101 Appendix. Historical Capital FrameworksU.S. capital standards have a long history featuring many fundamental changes in how they work, U.S. capital standards have a long history featuring many fundamental changes in how they work,
sometimes returning to approaches that had previously been discarded. Typically, financial crises sometimes returning to approaches that had previously been discarded. Typically, financial crises
create demand for new types of capital requirements in response to recent stress borne by the create demand for new types of capital requirements in response to recent stress borne by the
financial system. An example is the set of enhanced prudential standards first introduced in the financial system. An example is the set of enhanced prudential standards first introduced in the
years following the 2007-2009 financial crisis.years following the 2007-2009 financial crisis.
silver that bank owners were required to contribute to the bank in order for it to begin operations, silver that bank owners were required to contribute to the bank in order for it to begin operations,
and when national banks were first formed in the and when national banks were first formed in the
requirements were based on the population of the area where the bank was headquartered.requirements were based on the population of the area where the bank was headquartered.
102 Banks were then required to build additional capital levels referred to as Banks were then required to build additional capital levels referred to as
to 20% of their formation capital requirements. This could be drawn down as banks incurred to 20% of their formation capital requirements. This could be drawn down as banks incurred
losses, but banks were not allowed to pay dividends until the surpluses were rebuilt. In the early losses, but banks were not allowed to pay dividends until the surpluses were rebuilt. In the early
20th
's operations rather than the geographic area it served. For example, in 1914, the OCC implemented operations rather than the geographic area it served. For example, in 1914, the OCC implemented
a capital-to-deposits ratio for national banks, and by the 1930s, California, New York, Michigan, a capital-to-deposits ratio for national banks, and by the 1930s, California, New York, Michigan,
and Texas established capital requirements for state-chartered banks in proportion to their and Texas established capital requirements for state-chartered banks in proportion to their
deposits.deposits.
requirement equal to 10% of deposits.requirement equal to 10% of deposits.
however, deposit withdrawals became less risky, and asset losses became the primary focus for however, deposit withdrawals became less risky, and asset losses became the primary focus for
capital regulation.capital regulation.
meant their holdings comprised more meant their holdings comprised more
penalizing banks for investing in these low-yield and penalizing banks for investing in these low-yield and
requirements to deduct Treasury holdings from assets in the denominator of the capital-to-asset requirements to deduct Treasury holdings from assets in the denominator of the capital-to-asset
ratio calculations.ratio calculations.
assets that were held for the purposes of earning a return, which were generally associated with assets that were held for the purposes of earning a return, which were generally associated with
time, the Fed, FDIC, and OCC adopted an approach to measuring capital that established risk time, the Fed, FDIC, and OCC adopted an approach to measuring capital that established risk
categories for different types of assets and different capital requirements within each category. categories for different types of assets and different capital requirements within each category.
Regulators modified this requirement by adding a liquidity test, which required more capital for Regulators modified this requirement by adding a liquidity test, which required more capital for
less liquid institutions. Capital adequacy was largely viewed in terms of how much capital an less liquid institutions. Capital adequacy was largely viewed in terms of how much capital an
institution had versus the amount required as determined by the adjusted risk approach.institution had versus the amount required as determined by the adjusted risk approach.
disagreement over what assets to risk adjust, and by the 1960s, the OCC abandoned the risk disagreement over what assets to risk adjust, and by the 1960s, the OCC abandoned the risk
adjustments adjustments
management, liquidity, asset quality, or earnings trends.management, liquidity, asset quality, or earnings trends.
disagreed on how to define disagreed on how to define capital. The Fed continued to define it as equity plus reserves for loan . The Fed continued to define it as equity plus reserves for loan
losses, while the FDIC and OCC allowed some forms of debt to count. It was not until the 1980s losses, while the FDIC and OCC allowed some forms of debt to count. It was not until the 1980s
that the agencies began to coordinate capital requirements.that the agencies began to coordinate capital requirements.
for determining capital adequacy. The new definition comprised for determining capital adequacy. The new definition comprised
redemption or retirement, such as common stock, reserves for loan losses, and other capital redemption or retirement, such as common stock, reserves for loan losses, and other capital
reserves. reserves. Secondary capital included nonpermanent forms of equity, such as redeemable preferred included nonpermanent forms of equity, such as redeemable preferred
stock and subordinated debt. The regulators also created minimum levels of capital to determine stock and subordinated debt. The regulators also created minimum levels of capital to determine
capital adequacy for community banks and regional banks.capital adequacy for community banks and regional banks.
ruled that regulators did not have the authority to impose cease-and-desist orders on banks with ruled that regulators did not have the authority to impose cease-and-desist orders on banks with
capital inadequacy as determined by capital ratios.capital inadequacy as determined by capital ratios.
Lending Supervision Act (ILSA),Lending Supervision Act (ILSA),
capital standards and authorized them to enforce these capital standards.capital standards and authorized them to enforce these capital standards.
capital-to-asset ratio of 5.5% and total capital of 6%. Because the ratio was a simple capital-to-capital-to-asset ratio of 5.5% and total capital of 6%. Because the ratio was a simple capital-to-
asset calculation, banks began increasing their holdings of higher yielding assets, and because asset calculation, banks began increasing their holdings of higher yielding assets, and because
capital requirements applied only to balance sheet items, banks began to expand off-balance-sheet capital requirements applied only to balance sheet items, banks began to expand off-balance-sheet
activity.activity.
also stated that the Fed and Treasury should work with other countries to strengthen capital bases also stated that the Fed and Treasury should work with other countries to strengthen capital bases
to) capital standards issued by the BCBS, an international standard setting body (see text box).to) capital standards issued by the BCBS, an international standard setting body (see text box).
History of the Basel Committee
exchange rate crisis. After the exchange rate crisis. After the
losses. In response to these and other disruptions in the international financial markets, the central bank losses. In response to these and other disruptions in the international financial markets, the central bank
governors of the G-10 countries established a Committee on Banking Regulations and Supervisory Practices (later governors of the G-10 countries established a Committee on Banking Regulations and Supervisory Practices (later
renamed the Basel Committee on Banking Supervision, or BCBS) at the end of 1974 to facilitate regular renamed the Basel Committee on Banking Supervision, or BCBS) at the end of 1974 to facilitate regular
cooperation between its member countries on banking supervisory matters and to enhance financial stability.cooperation between its member countries on banking supervisory matters and to enhance financial stability.
In 1975, the BCBS issued a paper that came to be known as the In 1975, the BCBS issued a paper that came to be known as the
for sharing supervisory responsibility for banksfor sharing supervisory responsibility for banks
and parent (or home) supervisory authorities. In May 1983, the Concordat was revised and re-issued as and parent (or home) supervisory authorities. In May 1983, the Concordat was revised and re-issued as Principles
for the Supervision of Banks
115 Capital adequacy soon became the main focus of the BCBSCapital adequacy soon became the main focus of the BCBS
American debt crisis heightened the BCBSAmerican debt crisis heightened the BCBS
deteriorating at a time of growing international risks. This resulted in a broad consensus on a weighted approach deteriorating at a time of growing international risks. This resulted in a broad consensus on a weighted approach
to the measurement of risk both on and off banksto the measurement of risk both on and off banks
According to BCBS, According to BCBS,
multinational accord to strengthen the stability of the international banking system and to remove a source of multinational accord to strengthen the stability of the international banking system and to remove a source of
competitive inequality arising from differences in national capital requirements.competitive inequality arising from differences in national capital requirements.
consultative paper published in December 1987, a capital measurement system commonly referred to as the Basel consultative paper published in December 1987, a capital measurement system commonly referred to as the Basel
Capital Accord was approved by the G-10 governors and released to banks in July 1988.Capital Accord was approved by the G-10 governors and released to banks in July 1988.
banks. Since 1988, BCBS has issued three iterative frameworks, referred to as Basel I, II, and III. banks. Since 1988, BCBS has issued three iterative frameworks, referred to as Basel I, II, and III.
While the Basel frameworks (also referred to as While the Basel frameworks (also referred to as
States, it is helpful to understand the BCBS approach because domestic regulators have chosen to States, it is helpful to understand the BCBS approach because domestic regulators have chosen to
closely align their rules—which are implemented through the notice-and-comment rulemaking closely align their rules—which are implemented through the notice-and-comment rulemaking
process pursuant to the Administrative Procedure Act—with these frameworks. This choice is process pursuant to the Administrative Procedure Act—with these frameworks. This choice is
arguably predictable given that members of BCBS negotiate the rules together and that U.S. bank arguably predictable given that members of BCBS negotiate the rules together and that U.S. bank
regulators are, as the representatives from the worldregulators are, as the representatives from the world
influential members. As such, BCBS standards likely reflect, at least in part and possibly influential members. As such, BCBS standards likely reflect, at least in part and possibly
significantly, the views and preferences of the U.S. agencies. A driving concern of the BCBS has significantly, the views and preferences of the U.S. agencies. A driving concern of the BCBS has
historically been avoiding a historically been avoiding a
countries such as the United States concerned that small countries will enact lax standards to countries such as the United States concerned that small countries will enact lax standards to
entice banks to locate in their jurisdictions.entice banks to locate in their jurisdictions.
Basel I
Basel I was established in 1988 and focused mainly on credit risk, establishing a classification Basel I was established in 1988 and focused mainly on credit risk, establishing a classification
system for risk weighting bank assets. It featured five risk categories of 0%, 10%, 20%, 50%, and system for risk weighting bank assets. It featured five risk categories of 0%, 10%, 20%, 50%, and
100%. Basel I proposed minimum capital equal to 8% of RWA. Capital comprised two forms: 100%. Basel I proposed minimum capital equal to 8% of RWA. Capital comprised two forms:
Tier 1 capital and 1 capital and
the basic funding of the bank. Tier 2 capital is less loss absorbent.the basic funding of the bank. Tier 2 capital is less loss absorbent.
that required banking organizations to maintain regulatory capital against exposures both on and that required banking organizations to maintain regulatory capital against exposures both on and
minimum capital charges ranging from 0% to 8%.minimum capital charges ranging from 0% to 8%.
applied the framework to all U.S. banking organizations. In the 1990s, it became apparent that applied the framework to all U.S. banking organizations. In the 1990s, it became apparent that
Basel I had some limitations, particularly for larger banks. For example, the Basel I rules required Basel I had some limitations, particularly for larger banks. For example, the Basel I rules required
the same amount of regulatory capital against all unsecured corporate loans and bonds regardless the same amount of regulatory capital against all unsecured corporate loans and bonds regardless
of actual risk and treated almost all first-lien residential mortgage exposures as equally risky. This of actual risk and treated almost all first-lien residential mortgage exposures as equally risky. This
provided an incentive for banking organizations to shed lower-risk exposures and acquire or provided an incentive for banking organizations to shed lower-risk exposures and acquire or
retain higher-risk exposures within some asset categories. The Basel I–based rules also did not retain higher-risk exposures within some asset categories. The Basel I–based rules also did not
take into account important elements of credit-risk mitigation—such as most forms of collateral, take into account important elements of credit-risk mitigation—such as most forms of collateral,
many guarantees and credit derivatives, and the maturity and seniority of exposures—and, thus, many guarantees and credit derivatives, and the maturity and seniority of exposures—and, thus,
may have blunted incentives for banks to reduce or otherwise manage risk. In addition, the Basel may have blunted incentives for banks to reduce or otherwise manage risk. In addition, the Basel
I–based rules were considered particularly inadequate for dealing with capital markets I–based rules were considered particularly inadequate for dealing with capital markets
transactions, such as repurchase agreements, securities borrowing and lending, margin loans, and transactions, such as repurchase agreements, securities borrowing and lending, margin loans, and
over-the-counter derivatives. As these examples illustrate, simple rules have limitations that over-the-counter derivatives. As these examples illustrate, simple rules have limitations that
regulators subsequently attempted to address through increasingly complex rules. In response, regulators subsequently attempted to address through increasingly complex rules. In response,
BCBS initiated a revision to the capital framework, which became Basel II.BCBS initiated a revision to the capital framework, which became Basel II.
117 Basel II
In June 2004, BCBS introduced a more risk-sensitive capital adequacy framework, Basel II, In June 2004, BCBS introduced a more risk-sensitive capital adequacy framework, Basel II,
designed to promote improved risk measurements and to better align capital requirements with designed to promote improved risk measurements and to better align capital requirements with
risk. Basel II included three pillars: minimum regulatory capital requirements, supervisory review risk. Basel II included three pillars: minimum regulatory capital requirements, supervisory review
of capital adequacy, and market discipline through enhanced public disclosure.of capital adequacy, and market discipline through enhanced public disclosure.
credit risk and operational risk. For measuring credit risk, Basel II included three approaches: a credit risk and operational risk. For measuring credit risk, Basel II included three approaches: a
standardized approach, which modifies and enhances the Basel I approach, and two internal standardized approach, which modifies and enhances the Basel I approach, and two internal
ratings-based approaches—foundation and advanced—that use an institutionratings-based approaches—foundation and advanced—that use an institution
of key risk parameters in combination with supervisory capital formulas to determine risk-based of key risk parameters in combination with supervisory capital formulas to determine risk-based
capital requirements. Under the foundation approach, banking organizations estimated some risk capital requirements. Under the foundation approach, banking organizations estimated some risk
parameters, and supervisors set others. Under the advanced approach, banking organizations parameters, and supervisors set others. Under the advanced approach, banking organizations
determined all of the key risk parameters.determined all of the key risk parameters.
approach, a standardized approach, and an advanced measurement approach. The basic indicator approach, a standardized approach, and an advanced measurement approach. The basic indicator
approach and the standardized approach both linked operational risk capital requirements to fixed approach and the standardized approach both linked operational risk capital requirements to fixed
percentages of a banking organizationpercentages of a banking organization
relied on a banking organizationrelied on a banking organization
processes. Banking organizations with significant trading activities also factored in a measure for processes. Banking organizations with significant trading activities also factored in a measure for
exposure to market risk.exposure to market risk.
three banking regulators agreed upon. The final rule, issued in 2007, implemented only the three banking regulators agreed upon. The final rule, issued in 2007, implemented only the
advanced internal rating approach to calculating credit risk and the advanced measurement advanced internal rating approach to calculating credit risk and the advanced measurement
implementing Basel II identified three groups: banks required to adopt the advanced approaches implementing Basel II identified three groups: banks required to adopt the advanced approaches
do not need to use advanced approaches (do not need to use advanced approaches (
standardized approach. Core banks were institutions with either consolidated total assets of $250 standardized approach. Core banks were institutions with either consolidated total assets of $250
billion or more, consolidated foreign exposures of $10 billion or more, or subsidiaries of billion or more, consolidated foreign exposures of $10 billion or more, or subsidiaries of
institutions that use the advanced approach.institutions that use the advanced approach.
regulators to exclude a bank from the advanced approach for a variety of reasons.)regulators to exclude a bank from the advanced approach for a variety of reasons.)
Financial Crisis to the Present: Dodd-Frank Act and Basel III
In the years leading up to the 2007-2009 financial crisis, banks In the years leading up to the 2007-2009 financial crisis, banks
insufficiently liquid, which was reflected in rapid credit growth and volatile pricing of risk.insufficiently liquid, which was reflected in rapid credit growth and volatile pricing of risk.
BCBS issued new principles for liquidity risk management in 2008,BCBS issued new principles for liquidity risk management in 2008,
further guidance on how to strengthen the Basel II framework.further guidance on how to strengthen the Basel II framework.
the United States had avoided collapse through large-scale government intervention, and the United States had avoided collapse through large-scale government intervention, and
widespread bank failures widespread bank failures
vulnerabilities revealed by the financial crisis. For the most part, the Dodd-Frank Act deferred to vulnerabilities revealed by the financial crisis. For the most part, the Dodd-Frank Act deferred to
the forthcoming Basel III on reforming capital requirements, but Section 171, known as the the forthcoming Basel III on reforming capital requirements, but Section 171, known as the
Collins Amendment, required the bank regulators to establish minimum leverage and risk-based Collins Amendment, required the bank regulators to establish minimum leverage and risk-based
capital requirements, on a consolidated basis, for all insured depository institutions and capital requirements, on a consolidated basis, for all insured depository institutions and
depository institution holding companies, as well as nonbank financial companies supervised by depository institution holding companies, as well as nonbank financial companies supervised by
the Fed. This is an example of how, although the Basel Accords do not require congressional the Fed. This is an example of how, although the Basel Accords do not require congressional
approval to become U.S. regulation, Congress can nevertheless make statutory changes to capital approval to become U.S. regulation, Congress can nevertheless make statutory changes to capital
requirements, regardless of whether they are part of Basel.requirements, regardless of whether they are part of Basel.
financial crisis, revising and updating the Basel II standards. These new standards, many of which financial crisis, revising and updating the Basel II standards. These new standards, many of which
were new capital requirements and some of which apply only to large banks, came to be known were new capital requirements and some of which apply only to large banks, came to be known
as Basel III and included the following:as Basel III and included the following:
and resolution.and resolution.
details of the Basel III framework were later agreed to in 2017details of the Basel III framework were later agreed to in 2017
frame of the final measures taking place from 2023 to 2028.frame of the final measures taking place from 2023 to 2028.
couple of years of proposed rulemaking.couple of years of proposed rulemaking.
implementation of Basel III, changes to the existing capital framework to be consistent with implementation of Basel III, changes to the existing capital framework to be consistent with
Dodd-Frank, revisions to the calculation of RWA under the Basel II standardized approach, and Dodd-Frank, revisions to the calculation of RWA under the Basel II standardized approach, and
changes to the advanced approaches risk-based capital rules. Regulators also included changes to changes to the advanced approaches risk-based capital rules. Regulators also included changes to
specific risk weights and definitions to better reflect risks that had been problematic during the specific risk weights and definitions to better reflect risks that had been problematic during the
financial crisis, such as high volatility commercial real estate (HVCRE). As a result, details of the financial crisis, such as high volatility commercial real estate (HVCRE). As a result, details of the
U.S. capital rules diverge in places from the Basel III framework, sometimes in ways that make U.S. capital rules diverge in places from the Basel III framework, sometimes in ways that make
the U.S. rules stricter.the U.S. rules stricter.
several years, with most parts phased in by 2016 but some subparts being implemented in 2022. several years, with most parts phased in by 2016 but some subparts being implemented in 2022.
Some of the provisions implemented in the final rule are listed Some of the provisions implemented in the final rule are listed
Table A-1. Key Provisions of U.S. Basel III Implementation
Provision
adjustments and deductions
approaches institutions)approaches institutions)
Advanced approaches institutions
Source: Davis Polk, Davis Polk,
https://www.davispolk.com/sites/default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdfhttps://www.davispolk.com/sites/default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdf
. Notes: Market risk institutions have aggregate trading assets and liabilities of more than 10% of total assets or Market risk institutions have aggregate trading assets and liabilities of more than 10% of total assets or
more than $1 more than $1
Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174), Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174),
which reduced the number of banks subject to the large bank capital framework resulting from which reduced the number of banks subject to the large bank capital framework resulting from
the Dodd-Frank Act (discussed in the section the Dodd-Frank Act (discussed in the section
Footnotes
Equity may be publicly traded in the case of a publicly listed bank or held by owners in an illiquid form for privately held banks.
The term bank is used generally in this report to refer to an institution that is subject to capital requirements and has one of the federal bank regulators as its primary regulator. All banks that accept federally insured deposits face capital requirements. There are also more exotic types of bank charters that the three regulators have respective jurisdiction over that are ignored here for simplicity. For more on who regulates which type of bank, see CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework, by Marc Labonte.
Differences in capital standards among regulators are minimal. For details, see Office of the Comptroller of the Currency (OCC) et al., "Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies as of September 30, 2022," 88 Federal Register 5960, January 30, 2023, https://www.govinfo.gov/content/pkg/FR-2023-01-30/pdf/2023-01697.pdf.
Federal Deposit Insurance Corporation (FDIC), "Capital," in Risk Management Manual of Examination Policies, August 2022, p. 2.1-3, https://www.fdic.gov/regulations/safety/manual/section2-1.pdf.
For background, see CRS Report R41427, Troubled Asset Relief Program (TARP): Implementation and Status, by Baird Webel; and CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.
See the section entitled "Community Bank Leverage Ratio (CBLR)."
See the section entitled "Large Bank Enhanced Capital Framework."
First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674 (5th Cir. 1983).
There are no regulatory penalties for being adequately capitalized. However, to avoid the capital restrictions associated with failing to meet the capital conservation buffer (CCB; see main text), banks would need to exceed the PCA well-capitalized standards. Regulators also evaluate for capital adequacy as part of their supervisory exams, so banks might seek to maintain well-capitalized status to avoid any negative effect on their CAMELS ratings. For background on bank supervision, see CRS Report R46648, Bank Supervision by Federal Regulators: Overview and Policy Issues, by David W. Perkins.
FDIC, "Prompt Corrective Action," in Formal and Informal Enforcement Actions Manual, June 2022, p. 5, https://www.fdic.gov/regulations/examinations/enforcement-actions/ch-05.pdf.
12 U.S.C. §1820(d)(4).
12 C.F.R. §§337.6 et seq.
FDIC, Formal and Informal Enforcement Actions Manual, p. 5.
All three of the CET1, Tier 1, and total capital requirements must be at least 2.5 percentage points above the minimum requirements to avoid restrictions on capital distributions. Restrictions on capital distributions are also tied to the countercyclical capital buffer for applicable banks, which has always been set at zero in practice. See the section entitled "Countercyclical Capital Buffer."
In addition to these requirements, a type of depository institution chartered as a federal savings association must maintain a 1.5% tangible capital ratio. See 12 U.S.C. §1464(t).
BCBS, Strengthening the Resilience of the Banking Sector, December 2009, https://www.bis.org/publ/bcbs164.pdf; Asli Demirguc-Kunt et al., Bank Capital: Lessons from the Financial Crisis, International Monetary Fund, Working Paper WP/10/286, December 2010, https://www.imf.org/external/pubs/ft/wp/2010/wp10286.pdf.
For more on the CBLR, see CRS Report R45989, Community Bank Leverage Ratio (CBLR): Background and Analysis of Bank Data, by David W. Perkins.
Federal Reserve et al., "Federal Bank Regulatory Agencies Issue Final Rule to Simplify Capital Calculation for Community Banks," press release, October 29, 2019, https://www.fdic.gov/news/news/press/2019/pr19100.html.
Comptroller of the Currency, Federal Reserve System, and FDIC, "Regulatory Capital Rule: Community Bank Leverage Ratio Framework," 91 Federal Register 22973, April 29, 2026.
Previously, FSOC had designated four nonbank SIFIs for enhanced prudential regulation; all four have since been de-designated.
BHCs are legal entities that allow more than one bank to be owned within the same ownership group. Banks within a holding company can be structured as banking subsidiaries. A type of BHC called a financial holding company may own both bank subsidiaries and nonbank financial subsidiaries.
Federal Reserve, "Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign Banks to More Closely Match Their Risk Profiles," press release, October 10, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm.
Regulatory compliance costs refers to resources and manpower directly expended on ensuring that a bank is complying with regulation.
Some additional capital requirements apply to those banks that have elected to be advanced approaches banks. For simplicity, those additional capital requirements are not noted in the summary tables throughout this report.
OCC et al., "Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996," 84 Federal Register 35234, July 22, 2019, https://www.govinfo.gov/content/pkg/FR-2019-07-22/pdf/2019-15131.pdf.
OCC et al., "Regulatory Capital Rule: Modifications to the Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Their Subsidiary Depository Institutions; Total Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global Systemically Important Bank Holding Companies," 90 Federal Register 55248, December 1, 2025, https://www.federalregister.gov/documents/2025/12/01/2025-21626/regulatory-capital-rule-modifications-to-the-enhanced-supplementary-leverage-ratio-standards-for-us.
CRS calculations based on Financial Stability Board, 2025 List of Global Systemically Important Banks (G-SIBs), November 27, 2025, https://www.fsb.org/uploads/P271125.pdf. The G-SIB surcharge is added to the G-SIB's risk-weighted capital requirements based on each's systemic importance. The surcharge is based on which of two methods is higher. Method 1 on average yields a lower surcharge.
Board of Governors of the Federal Reserve System et al., "Agencies Issue Final Rule to Modify Certain Regulatory Capital Standards," press release, November 25, 2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20251125b.htm. For more information, see CRS In Focus IF13078, Bank Capital Requirements and Treasury Market Resiliency, by Marc Labonte.
OCC et al., "Regulatory Capital Rules," 79 Federal Register 24528, May 1, 2014, https://www.gpo.gov/fdsys/pkg/FR-2014-05-01/pdf/2014-09367.pdf.
Although the basic principle of leverage ratios is to treat all assets equally, policymakers have debated whether certain assets should be exempted. Section 402 of P.L. 115-174 allowed for custody banks—defined by the legislation as banks "predominantly engaged in custody, safekeeping, and asset servicing activities"—to no longer hold capital against funds deposited at certain central banks to meet the supplementary leverage ratio (SLR) up to an amount equal to customer deposits linked to fiduciary, custodial, and safekeeping accounts. All other banks would continue to be required to hold capital against central bank deposits. According to the implementing rule, the Bank of New York Mellon, Northern Trust, and State Street were the only banks that qualified for this exemption at the time. Board of Governors of the Federal Reserve System et al., "Agencies Finalize Changes to Supplementary Leverage Ratio as Required by Economic Growth, Regulatory Relief, and Consumer Protection Act," press release, November 19, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191119a.htm.
Because of the larger denominator, regulators originally estimated that an SLR of 3% is equivalent to a leverage ratio of 4.3%, on average. Thus, the 3% SLR requires affected banks to hold more capital on average than the 4% leverage ratio does.
One G-SIB has two major depository subsidiaries.
OCC et al., "Regulatory Capital Rule: Modifications to the Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Their Subsidiary Depository Institutions; Total Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global Systemically Important Bank Holding Companies," 90 Federal Register 228, December 1, 2025, https://www.federalregister.gov/documents/2025/12/01/2025-21626/regulatory-capital-rule-modifications-to-the-enhanced-supplementary-leverage-ratio-standards-for-us.
In response to the rapid increase in safe assets on bank balance sheets during the pandemic, the banking regulators provided temporary SLR relief by excluding Treasury securities and balances held at the Fed from the denominator. That relief expired at the end of March 2021, although bank balance sheets still remain larger than before the pandemic. Board of Governors of the Federal Reserve System et al., "Regulators Temporarily Change the Supplementary Leverage Ratio to Increase Banking Organizations' Ability to Support Credit to Households and Businesses in Light of the Coronavirus Response," press release, May 15, 2020, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200515a.htm.
For more information, see CRS In Focus IF13078, Bank Capital Requirements and Treasury Market Resiliency, by Marc Labonte.
Paul Cochran et al., "Dealers' Treasury Market Intermediation and the Supplementary Leverage Ratio," FEDS Notes, August 3, 2023, https://www.federalreserve.gov/econres/notes/feds-notes/dealers-treasury-market-intermediation-and-the-supplementary-leverage-ratio-20230803.html.
Basel Framework, "Leverage Ratio Requirements for Global Systemically Important Banks," March 27, 2020, https://www.bis.org/basel_framework/chapter/LEV/40.htm?inforce=20230101&published=20200327.
Bank for International Settlements, Basel III Summary Table, http://www.bis.org/bcbs/basel3/b3summarytable.pdf.
Federal Reserve, "Risk-Based Capital Guidelines: Implementation of Capital Requirements for Global Systemically Important Bank Holding Companies," 80 Federal Register 49082, August 14, 2015, https://www.federalreserve.gov/newsevents/press/bcreg/20150720a.htm.
Federal Reserve, Large Bank Capital Requirements, September 2025, https://www.federalreserve.gov/publications/files/large-bank-capital-requirements-20250829.pdf.
In addition to reducing the number of firms subject to stress testing, P.L. 115-174 also reduced the number of stress test scenarios and the frequency of company-run stress tests from semiannually to periodically. The Fed also reduced the frequency of Fed-run stress tests for banks with between $100 billion and $250 billion to every other year in 2019. Banks subject to stress tests every other year use those results to determine their capital requirements for two years. Federal Reserve, "Federal Reserve Board Releases Scenarios for 2019 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test Exercises," press release, February 5, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205b.htm.
Federal Reserve, "Federal Reserve Board Finalizes Hypothetical Scenarios for Its Annual Stress Test and Votes to Maintain the Current Stress Test-Related Capital Requirements Until Public Feedback Can Be Considered," press release, February 4, 2026, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20260204a.htm.
Prior to 2020, large banks had to separately comply with the CCB and hold enough capital above minimums to meet stress test losses, planned capital distributions, and projected balance sheet growth. The pre-2020 requirements required banks to hold more capital than the stress capital buffer (SCB).
For banks subject to the advanced approach, the 2.5% CCB remains for the advanced approach capital requirements. The SCB applies to the standardized approach capital requirements.
Federal Reserve, "Regulatory Capital Rules: The Federal Reserve Board's Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer," 81 Federal Register 63682, September 16, 2016, https://www.federalreserve.gov/newsevents/press/bcreg/20160908b.htm.
12 C.F.R. Chapter II, Subchapter A, Part 252. Federal Reserve, "Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations," 82 Federal Register 8266, January 24, 2017, https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically.
Capital required by total loss-absorbing capacity (TLAC) is not in addition to capital required under standard capital requirements, and standard capital requirements are the same or higher than TLAC. However, TLAC capital must be issued by the holding company, whereas banks must meet standard capital requirements at both the depository subsidiary level and the holding company level. Some banks might have to hold more capital to meet both of these requirements simultaneously.
The long-term-debt requirement for unweighted assets and the TLAC leverage buffer were reduced in 2025 to parallel the reduction in the enhanced supplementary leverage ratio. See OCC et al., "Regulatory Capital Rule: Modifications to the Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Their Subsidiary Depository Institutions; Total Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global Systemically Important Bank Holding Companies," 90 Federal Register 30780, July 10, 2025, https://www.govinfo.gov/content/pkg/FR-2025-07-10/pdf/2025-12787.pdf.
12 C.F.R. §225.220. Federal Reserve, "Enhanced Prudential Standards," 79 Federal Register 17240, March 27, 2014, https://www.gpo.gov/fdsys/pkg/FR-2014-03-27/pdf/2014-05699.pdf. Unlike the leverage ratio found in Basel III, this emergency ratio is based on liabilities instead of assets. It is calculated as total liabilities relative to total equity capital minus goodwill. This ratio is inverted compared with the leverage ratio—capital is in the numerator rather than the denominator.
Federal Reserve, "Enhanced Prudential Standards and Early Remediation Requirements," 77 Federal Register 594, January 5, 2012, https://www.gpo.gov/fdsys/pkg/FR-2012-01-05/pdf/2011-33364.pdf.
This thought experiment could be expanded to address the extent to which the inexpensive provision of deposit services in the current system provides a social benefit.
BCBS, An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements, August 2010, https://www.bis.org/publ/bcbs173.pdf.
Although adjusting capital requirements results in a trade-off between risk and credit availability at moderate capital levels, if capital requirements were below some minimal threshold, raising capital requirements could boost credit availability over time by delivering a more stable banking system.
Because banks that are "too big to fail" pose more systemic risk and more potential strain on the safety net than small banks do, the argument would be that capital requirement for them should theoretically be set higher than for small banks to align with their social costs.
Further, capital requirements could exacerbate downturns—if banks make fewer loans during downturns to stop themselves from falling below capital requirements, it would further decrease economic activity.
Simon Firestone et al., An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US, Federal Reserve, Working Paper 2017-034, https://www.federalreserve.gov/econres/feds/files/2017034pap.pdf; Skander J. Van den Heuvel, The Welfare Effects of Bank Liquidity and Capital Requirements, Federal Reserve, November 2022, https://www.federalreserve.gov/econres/feds/the-welfare-effects-of-bank-liquidity-and-capital-requirements.htm; and BCBS, An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements.
Small banks may face disproportionately higher compliance costs, and so the benefits of simpler rules may be greater for them.
Andrew G. Haldane, The Dog and the Frisbee, speech, August 31, 2012, https://www.bis.org/review/r120905a.pdf; and Karen Petrou, A Holistic Construct for Bank Regulatory Capital, July 6, 2022, https://fedfin.com/wp-content/uploads/2022/07/FedFin-Issue-Brief-A-Holistic-Construct-for-Bank-Regulatory-Capital.pdf.
See the section entitled "Community Bank Leverage Ratio."
The binding requirement will vary from bank to bank—and possibly over time for a given bank—depending on the types of capital and assets it holds. Typically, a bank aims to hold enough capital to always stay comfortably above whatever amount is required by the binding ratio. It nevertheless must take into account whichever requirement is binding in all its actions. In reality, the binding requirement is the one that costs the bank the most to hold—for example, if a bank's RWA were such that it was required to hold $8 million in total capital, and its total assets were such that it had to hold $7 million in Tier 1 to meet its leverage ratio requirements. It is possible that the $7 million in Tier 1 cost the bank more to raise than the $6 million in Tier 1 plus $2 million in Tier 2 capital ($8 million in total) cost to raise.
Karen Petrou, A Holistic Construct for Bank Regulatory Capital, July 6, 2022, https://fedfin.com/wp-content/uploads/2022/07/FedFin-Issue-Brief-A-Holistic-Construct-for-Bank-Regulatory-Capital.pdf.
The regulators provided temporary relief to banks subject to the SLR during the pandemic by exempting Treasury securities and bank reserves from the SLR. This relief expired in March 2021.
Regulators could not reduce the leverage ratio below 4% without a legislative change because the Collins Amendment prohibits regulators from setting capital requirements below those in place in 2010.
The Vice Chair for Supervision is responsible for regulatory policy at the Fed. President Trump selected Michelle Bowman to be the Vice Chair for Supervision in 2025.
OCC et al., "Regulatory Capital Rule: Amendments Applicable to Large Banking Organizations and to Banking Organizations with Significant Trading Activity," 88 Federal Register 64028, September 18, 2023, https://www.govinfo.gov/content/pkg/FR-2023-09-18/pdf/2023-19200.pdf. The proposal would have also required banks with over $100 billion in assets to include unrealized capital gains and losses on available-for-sale (AFS) debt securities in calculating their capital levels. (This was reproposed in 2026 in the standardized approach proposal rather than the Endgame proposal; see the section entitled "New Requirements for AOCI.") The proposal would have also extended two capital requirements—the SLR and countercyclical capital buffer—to all banks with over $100 billion in assets. For more information on the 2023 proposal, see CRS Report R47855, Bank Capital Requirements: Basel III Endgame, by Marc Labonte and Andrew P. Scott.
U.S. Congress, House Committee on Financial Services, Implementing Basel III: What's the Fed's Endgame?, hearing, 118th Cong., 1st sess., September 23, 2023, https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408961.
Those revisions were never publicly released. Claire Williams and Kyle Campbell, "Inside the Impasse Erupting on the FDIC Board Over Basel," American Banker, September 20, 2024, https://www.americanbanker.com/news/inside-the-impasse-erupting-on-the-fdic-board-over-basel.
Comptroller of the Currency et al., "Regulatory Capital Rule: Category I and II Banking Organizations, Banking Organizations With Significant Trading Activity, and Optional Adoption for Other Banking Organizations," 91 Federal Register 14952, March 27, 2026, https://www.federalregister.gov/documents/2026/03/27/2026-05959/regulatory-capital-rule-category-i-and-ii-banking-organizations-banking-organizations-with.
Credit risk includes default risk on assets such as loans and bonds. Operational risk covers risks related to internal controls and external events (e.g., losses from fraud, cyberattacks, or litigation.) The market risk framework covers the risk of price movements in the value of assets and includes a credit valuation risk framework for derivatives.
For more information on source of strength, see CRS Report R48291, Bank Holding Companies: Background and Issues for Congress, by Marc Labonte.
Federal Reserve, "Statement on Enhanced Supplementary Leverage Ratio Proposal by Governor Michael S. Barr," press release, June 25, 2025, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20250625.htm.
Comptroller of the Currency et al., "Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets," 91 Federal Register 15338, March 27, 2026.
Comptroller of the Currency et al., "Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets," 91 Federal Register 15338, March 27, 2026.
Comptroller of the Currency et al., "Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets," 91 Federal Register 15338, March 27, 2026.
To be eligible to use this approach, a residential mortgage exposure would need to meet several requirements, including being secured by a property that is either owner-occupied or rented, not being 90 days or more past due or carried in nonaccrual status, and not being restructured or modified.
See Tables III.1 and III.2 in 91 Federal Register 15340.
A corporate exposure could be a debt obligation of a company, such as a loan made to a corporation.
A similar change for Category I and II banks was included in the Endgame proposal discussed earlier in this section. See 91 Federal Register 14956, https://www.federalregister.gov/d/2026-05959/page-14956.
Banks classify the debt securities they invest in as either trading, AFS, or held to maturity, depending on how likely the bank is to sell a security over a particular time frame. For AFS, a bank does not have current plans to sell but recognizes a possibility of selling before the security matures.
OCC et al., "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action," 91 Federal Register 52811, August 30, 2012, https://www.govinfo.gov/content/pkg/FR-2012-08-30/pdf/2012-16757.pdf#page=20; Federal Reserve, "Federal Reserve Board Invites Comment on Three Proposed Rules Intended to Help Ensure Banks Maintain Strong Capital Positions," press release, June 7, 2012, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20120607a.htm.
Provisions, Prompt Corrective Action, Standardized Approach for Risk-Provisions, Prompt Corrective Action, Standardized Approach for Risk-
Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule,Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule,
Register 62018, October 11, 2013 62018, October 11, 2013
Federal Reserve, "Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign Banks to More Closely Match Their Risk Profiles," press release, October 10, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm.
FDIC data available at https://www.fdic.gov/quarterly-banking-profile/qbp-all-fdic-insured-institutions-charts-and-data-first-quarter-2026.xlsx.
For more information, see CRS Insight IN12232, Banks' Unrealized Losses, Part 2: Comparing to SVB, by Marc Labonte.
To a lesser extent, unrealized losses on securities also played a role in the failures of Signature and First Republic Banks. See FDIC, "FDIC's Supervision of Signature Bank," April 28, 2023, p. 16, https://www.fdic.gov/news/press-releases/2023/pr23033a.pdf; and Rachel Louise Ensign and Ben Eisen, "First Republic Bank Is Seized, Sold to JPMorgan in Second-Largest U.S. Bank Failure," Wall Street Journal, May 1, 2023, https://www.wsj.com/articles/first-republic-bank-is-seized-sold-to-jpmorgan-in-second-largest-u-s-bank-failure-5cec723.
The Fed also reports that SVB would have had to start complying with the AOCI requirement in 2021 as an advanced approach bank had the 2019 tailoring rule not limited the AOCI requirement to Category I and II banks. Federal Reserve, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023, https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
Board of Governors of the Federal Reserve System, "Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report (FR Y-15)," 88 Federal Register 60385, July 27, 2023, https://www.federalregister.gov/documents/2023/09/01/2023-16896/regulatory-capital-rule-risk-based-capital-surcharges-for-global-systemically-important-bank-holding.
Federal Reserve, "Regulatory Capital Rule (Regulation Q): Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report (FR Y–15)," 91 Federal Register 14908, March 27, 2026, https://www.govinfo.gov/content/pkg/FR-2026-03-27/pdf/2026-05961.pdf.
As discussed above, banks are subject to multiple capital requirements at the holding company and subsidiary level. How much capital effectively declines under a regulatory change depends on how much it declines under a bank's binding requirement. Which requirement is binding varies by bank. The figure measures the change in required Tier 1 capital at the holding company level, but other measures would yield a different estimate. As discussed above, consolidated capital at the holding company level measures how much capital is available for the entire banking organization.
See the section entitled "Basel III "Endgame.""
See the section entitled "Supplementary Leverage Ratio."
See the section entitled "Standardized Approach."
See the section entitled "New Requirements for AOCI."
See, for example, the comment letter on the Endgame proposal submitted jointly by Bank Policy Institute, the American Bankers Association, the Financial Services Forum, the U.S. Chamber of Commerce, and the Consumer Bankers Association, available at https://bpi.com/wp-content/uploads/2026/06/Joint-Trades-Comment-on-Basel-Proposal-6.18.26.pdf.
The National Banking Act of 1864 sets an early example of formation capital requirements. At formation, banks were required to establish minimum capital levels such as $50,000 for banks in cities with fewer than 6,000 people, $100,000 for cities of fewer than 50,000 people, and $200,000 for cities of more than 50,000 people. For more, see John Walter, "US Bank Capital Regulation: History and Changes Since the Financial Crisis," Federal Reserve Bank of Richmond Economic Quarterly, vol. 105, no. 1 (First Quarter 2019), https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2019/q1/walter.pdf.
Walter, "US Bank Capital Regulation."
The average capital-to-deposits ratio from 1920 to 1939 was 15.2%, suggesting that the minimum of 10% was not binding for many banks. See Walter, "US Bank Capital Regulation."
Karlyn Mitchell, "Capital Adequacy at Commercial Banks," Federal Reserve Bank of Kansas City Economic Review (September/October 1984), https://www.kansascityfed.org/documents/1049/1984-Capital%20Adequacy%20at%20Commercial%20Banks.pdf.
Walter, "US Bank Capital Regulation."
Malcolm Alfriend, "International Risk-Based Capital Standard: History and Explanation," Federal Reserve Bank of Richmond Economic Review (November/December 1988), https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_review/1988/pdf/er740603.pdf.
Mitchell, "Capital Adequacy at Commercial Banks."
Alfriend, "International Risk-Based Capital Standard."
While agency coordination is not inherently good or bad (for instance, regulators could coordinate a bad policy), industry has generally viewed disparate treatment of similar issues by the three federal banking agencies as burdensome, confusing, or creating an un-level playing field. Typically, bank regulators coordinate rulemaking on issues affecting all banks in some way.
Larger institutions, referred to as "multinational banks," were excluded from this measurement system until 1983, when the Fed set a minimum capital ratio of 5% for multinational banks. See Mitchell, "Capital Adequacy at Commercial Banks."
First National Bank of Bellaire, 697 F.2d at 681-682.
12 U.S.C. §§3901 et seq.
Off-balance-sheet (OBS) activity refers to the operation of assets and liabilities that are not recorded on the balance sheet for accounting purposes. Examples of OBS assets include letters of credit, loan commitments, and transfers of financial assets; OBS liabilities include revolving underwriting facilities, certain contingent liabilities, and standby lines of credit. For more, see the FDIC examination manual at https://www.fdic.gov/regulations/safety/manual/section3-8.pdf.
BIS, "Principles for the Supervision of Banks' Foreign Establishments (Concordat)," May 28, 1983, https://www.bis.org/publ/bcbsc312.htm.
Federal Reserve, "ANPR for Proposed Revisions to the Current Risk-Based Capital Rules," September 30, 2005, https://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051006/Basel1Amemo.pdf.
Federal Reserve, "ANPR for Proposed Revisions to the Current Risk-Based Capital Rules."
Federal Reserve, "Implementation of Advanced Capital Adequacy Framework (Basel II Draft Final Rule)," October 26, 2007, https://www.federalreserve.gov/generalinfo/basel2/FinalRule_BaselII/Board_memo.pdf.
OCC et al., "Risk-Based Capital Standards: Advanced Capital Adequacy Framework—Basel II; Final Rule," 72 Federal Register 69288, December 7, 2007, https://www.govinfo.gov/content/pkg/FR-2007-12-07/pdf/07-5729.pdf.
Banks required to use advanced approaches would be redefined in 2019. See the section entitled "Advanced Approaches."
Alexander Chudik and Marcel Fratzscher, "Liquidity, Risk and the Global Transmission of the 2007-08 Financial Crisis and the 2010-11 Sovereign Debt Crisis," European Central Bank, February 2012, https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1416.pdf.
BCBS, Principles for Sound Liquidity Risk Management and Supervision, September 2008, https://www.bis.org/publ/bcbs144.pdf.
BCBS, Enhancements to Basel II Framework, July 2009, https://www.bis.org/publ/bcbs157.pdf.
BCBS, Basel III: Finalising Post-Crisis Reforms, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
See the section entitled "Basel III Endgame." The original final implementation of 2022 was delayed because of COVID-19.
OCC and Board of Governors of the Federal Reserve System, "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-Weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule," 78 Federal Register 62018, October 11, 2013.
Davis Polk, "U.S. Basel III Final Rule: Visual Memorandum," April 30, 2015, https://www.davispolk.com/sites/default/files/updated_april_2015_visual_memo_us_basel_3_final_rule.pdf.
(P.L. 115-174) and Selected Policy Issues, coordinated by David W. Perkins., coordinated by David W. Perkins.