US Regulators Grapple with Basel III Endgame and FRTB Implementation

US financial regulators are currently embroiled in complex discussions surrounding the implementation of the Basel III Endgame and the Fundamental Review of the Trading Book (FRTB). These proposed regulations aim to significantly alter capital requirements for major banks, sparking debate over their potential impact on market liquidity, bank operations, and the broader economy. Delays and potential revisions are anticipated as stakeholders weigh the implications.

Regulatory Crossroads: Basel III Endgame and FRTB

US regulators are grappling with the intricate details of the Basel III Endgame and the Fundamental Review of the Trading Book (FRTB). These initiatives are designed to enhance the resilience of the banking system by imposing stricter capital requirements. However, their implementation has become a contentious issue, with concerns raised about their potential effects on market liquidity, particularly in the repo market, and the operational burden on banks.

Key Takeaways

• Supplementary Leverage Ratio (SLR) Debate: A significant point of contention is the supplementary leverage ratio (SLR). The removal of a carve-out for US Treasuries and excess reserves from SLR calculations could force large US banks to reduce their exposures, potentially impacting repo lending and money market liquidity. There's a strong push from the industry to amend the SLR, possibly unbundling it from the broader Basel III implementation.
• Implementation Delays: A delay in the full implementation of Basel III in the US until 2026 is increasingly seen as inevitable. This is attributed to the complexity of the proposals, the need for extensive negotiation among regulatory agencies, and potential leadership changes within the Federal Reserve.
• FRTB Strategic Decisions: For US banks, FRTB presents a strategic challenge. They must decide between adopting a standardized model or an internal model for market risk capital calculations. Lessons from European banks, which are further along in FRTB implementation, are being closely watched.
• Political and Regulatory Dynamics: Republican lawmakers are advocating for a re-proposal of the controversial prudential rules. However, some analysts suggest that a faster finalization process might lead to a less ambitious, and potentially more palatable, version of the regulations.

Impact on Banks and Markets

The proposed regulations could have far-reaching consequences for US banks. Increased capital requirements may lead to a reduction in certain activities, such as repo lending, potentially affecting market liquidity. Banks are also facing significant operational and strategic decisions regarding their compliance with FRTB, which will necessitate substantial investments in systems and processes. The ongoing uncertainty surrounding the final form and timeline of these regulations adds to the complexity for financial institutions.

The Road Ahead

The path forward for Basel III Endgame and FRTB implementation in the US remains uncertain. The interplay between regulatory bodies, industry lobbying, and political considerations will shape the final outcome. Banks are advised to continue their preparations, adapting their strategies to navigate the evolving regulatory landscape.

Sources

• Ending leverage ratio relief could force US banks to downsize, Risk.net.
• Fed official: SLR tweaks likely unbundled from Basel III, Risk.net.
• US Basel III delay to 2026 seen as almost inevitable, Risk.net.
• FRTB: a question of strategy for US banks, Risk.net.
• Basel III endgame: why moving fast might prove better for banks, Risk.net.