U.S. Regulatory Capital Framework Modernization

A decisive moment for U.S. capital framework: Federal bank regulators propose sweeping modernization

breakdown of the three pillars of the u.s.regulatory capital framework modernization proposal

Expanded risk-based approach: A new standard for the largest banks

The centrepiece of the proposal is a new 'expanded risk-based approach' that fundamentally overhauls capital rules for the largest and most complex banking organizations (Category I and II firms).

• Moving beyond internal models: The most significant change is the move away from bank-run internal models for calculating credit and operational risk. In their place, regulators are mandating new, highly prescriptive standardized approaches. The goal is clear: to eliminate the variability and opacity of internal models and foster greater consistency and comparability across the industry.
• Simplifying the "stack": This new framework introduces a single "stack" for risk-based capital calculations. This is a welcome change that removes the complex and burdensome dual-calculation system (including the Collins Floor), streamlining the entire capital adequacy process.
• Enhanced risk sensitivity: While standardized, the new rules are far more risk sensitive. For credit risk, this means incorporating granular metrics, such as loan-to-value (LTV) ratios, for real estate. In a landmark move, the framework introduces a formal, explicit capital charge for operational risk for the first time, forcing banks to quantify and capitalize for risks such as fraud, legal, and cyber threats.
• An opt-in for other banks: Notably, institutions not in Categories I or II will have the option to adopt this expanded approach, allowing them to leverage a more sophisticated framework if it aligns with their business model.

Recalibrating the G-SIB surcharge

The proposal also refines the calculation of the capital surcharge for Global Systemically Important Banking organizations (G-SIBs), aiming to better capture their true systemic risk.

• Smoothing out volatility: The new methodology is designed to reduce the notorious "cliff effects" of the current surcharge calculation. By using annual averages of systemic indicators instead of year-end snapshots, the rule aims to curb incentives for banks to engage in "window dressing" their balance sheets simply to avoid a higher surcharge.
• More granular surcharges: Surcharges will now be set in finer 0.10 percentage point increments, ensuring a smoother, more predictable transition as a bank's systemic footprint changes.

A revised standardized approach for all banks (except Category I & II)

The proposal introduces a revised standardized approach for the majority of U.S. banks with a clear intent to align capital more closely with the risks of traditional lending.

• Incentivizing mortgage lending: In a significant shift, the proposal overhauls the treatment of residential mortgages to be more risk-sensitive and removes the often-punitive capital treatment for mortgage servicing assets. This is a direct attempt to lower capital costs for mortgage activities and encourage banks to compete more effectively against nonbank lenders.
• AOCI recognition for larger banks: Category III and IV institutions will now be required to recognize most elements of accumulated other comprehensive income (AOCI) in their regulatory capital, aligning them with the largest banks. A five-year transition period beginning in 2027 is proposed to soften the impact.
• A modern approach to securitizations (SEC-SA): The existing, overly simplistic methods for calculating risk in securitization exposures are being replaced. The new standardized approach for securitizations (SEC-SA) provides a more sophisticated and risk-sensitive framework.

Partner with Regnology

This proposed modernization of the capital framework represents one of the most significant regulatory shifts for U.S. financial services. While the compliance challenge is immense, the opportunity to gain a strategic advantage is even greater.

Instead of diverting critical internal resources to build and maintain a bespoke compliance system, partnering with Regnology allows you to leverage a proven, standardized solution. Our deep domain expertise in Basel, regulatory reporting, and risk management, is embedded in our Regnology Reporting Hub, ensuring you can navigate this transition efficiently and confidently. This frees your team to focus on what truly matters: analysing the strategic implications of the new framework and positioning your bank to thrive in the new regulatory landscape.