Basel 3 Endgame Package: A New Era for Banking Regulation

The Basel 3 Endgame Package is a significant update to banking regulations, marking a new era for the industry. It aims to strengthen banks' capital and liquidity requirements.

One key aspect is the introduction of a 4.5% common equity tier 1 (CET1) capital requirement, up from 4% previously. This increase is designed to enhance banks' resilience to financial shocks.

This change is expected to affect banks globally, as the Basel 3 Endgame Package is a worldwide standard. The updated rules will be implemented in phases, with some banks needing to meet the new requirements earlier than others.

Banks will need to maintain a minimum level of high-quality capital to meet the new CET1 requirement, which will likely involve significant changes to their balance sheets.

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Capital Requirements are a crucial aspect of Basel 3. The new rules introduce a more complex framework, with different categories for banks to fall into, each with its own set of requirements.

Category I banks, which include U.S. GSIBs with total assets of ≥ $700 billion or ≥ $75 billion in cross-jurisdictional activity, will have to meet a number of new standards. These include a standardized and advanced approaches expanded risk-based approach, as well as a countercyclical buffer.

For Category II banks, which include institutions with total assets of ≥ $250 billion or ≥ $75 billion in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure, the requirements are slightly different. They will also have to meet a standardized and advanced approaches expanded risk-based approach, and will be subject to a countercyclical buffer.

Category III and IV banks will also have to meet a countercyclical buffer, and will be subject to a standardized approach and expanded risk-based approach. All banks will also be required to have an operational risk management function that is independent of business line management.

Here's a breakdown of the different categories and their requirements:

The G-SIB Surcharge is a crucial component of the Basel III endgame. It's a surcharge that's applied to systemically important banks (G-SIBs) to reflect their systemic risk profile.

The Federal Reserve has proposed changes to the G-SIB Surcharge, which would improve its calculation to reflect changes in the global banking system since 2015. This includes accounting for effects from inflation and economic growth.

One of the proposed changes is to measure indicators on an average daily or monthly basis, rather than a single date. This would provide a more accurate picture of a G-SIB's systemic risk profile.

The Federal Reserve also wants to revise the systemic indicators for cross-jurisdictional claims and cross-jurisdictional liabilities to include derivatives. This change could have a significant impact on foreign banking organizations currently subject to Category III or IV standards.

The proposed changes would also reduce "cliff effects" by measuring surcharges in 10-basis point increments, rather than the current 50-basis point increments. This would help to avoid sudden and drastic changes in capital requirements.

The comment period for the proposed changes to the G-SIB Surcharge and FR Y-15 ends on November 30, 2023.

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The Proposal is expected to generate many comments from various stakeholders, touching on proposed risk-weights, the elimination of internal models, and the scope of application.

The Proposal's scope of application is a significant point of contention, with Agency principals initially suggesting it would apply only to the largest banking organizations. However, the proposed application to banking organizations with assets of $100 billion or more came as a surprise.

This threshold would force banking organizations to carefully consider whether to manage their balance sheet to stay below $100 billion or grow to a size where they can benefit from economies of scale despite increased regulatory burdens.

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The Proposal is expected to generate many comments from a wide array of stakeholders.

The proposed risk-weights and elimination of the ability to use internal models in most instances are likely to be major points of contention.

Multiple Federal Reserve governors and FDIC Board members expressed dissent in open board meetings, a rare occurrence.

The scope of application was a surprise to some, as Agency principals had previously suggested the new regime would only apply to the largest banking organizations.

Setting the threshold at $100 billion in total assets means that banking organizations will have to carefully consider whether to manage their balance sheet to stay below the threshold or grow to a size where they can benefit from economies of scale.

The timeline for implementation is a crucial aspect of any project. It will take approximately 6-12 months to complete the first phase, which includes a thorough analysis of the current system and the development of a comprehensive plan.

Key milestones include the completion of the data collection phase in 3 months, followed by the analysis and planning phase in 2 months. This will be followed by the implementation phase, which will take around 12-18 months to complete.

Regular progress updates will be provided to stakeholders, including quarterly meetings and bi-annual reports. This will ensure that everyone is informed and aligned with the project's progress.

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The project team will consist of 5 members, including a project manager, 2 analysts, and 2 implementers. This team will be responsible for overseeing the entire project and ensuring that it stays on track.

The total budget for the project is $250,000, which includes a contingency fund of 10%. This will ensure that any unexpected expenses are covered and the project can be completed on time.