Board of Governors of the Federal Reserve System

Opening Statement
Thank you, Chair Powell. I would like to begin by thanking our staff—here at the Board and at the other federal bank regulatory agencies—and the FDIC chair and OCC comptroller for all of the work that went into the interagency and Fed proposals. The Board members who serve on the Committee on Supervision and Regulation—Philip and Chris—also played an important role in providing feedback that enhanced the proposals, so I would like to recognize those contributions, as well. And as the Board is well aware, these are complex, lengthy and detailed proposals. I appreciate our Board Members' willingness to engage in extensive briefings and discussions with our staff over the past several weeks.

The three proposals we are considering today modernize the bank capital requirements that are the foundation of our regulatory framework.

Following the global financial crisis, regulators implemented reforms that substantially increased bank capital and strengthened our financial system. While these initial reforms were necessary, experience shows that overly calibrated requirements on low-risk activities produce unintended consequences. Many of these requirements have constrained credit availability, pushed activity into the less-regulated non-bank sector, and added complexity and costs without meaningfully enhancing safety and soundness.

Building on these lessons, our proposed approach to modernize the capital framework starts from a bottom-up review of each element of the framework. We evaluated each requirement on its merits—examining whether it aligns with risk, achieves its intended purpose, and avoids creating unintended outcomes. We also assessed the aggregate impact of these changes to ensure that the calibration of requirements for particular risks and activities is appropriate.

As staff will explain in greater detail, two of the proposals address pillars of the capital framework for our largest banks, the Basel III framework and the G-SIB surcharge. These proposals streamline the risk-based capital framework using a single set of calculations, improve alignment between requirements and risk, and revise the G-SIB surcharge to better capture the risks of our largest and most complex banks.

These changes should be considered as a part of a comprehensive review of capital requirements undertaken over the past nine months. We have carefully considered overlapping requirements between Basel III and stress testing to help ensure that, when combined, capital requirements appropriately capture risk rather than being overly punitive.

The third proposal updates the capital requirements for smaller and less complex banks. This proposal would better align these requirements with the risks of traditional lending activities, supporting our smaller banks in their critical role in our economy.

Together, these changes would strengthen our overall capital framework, which would remain robust under the new regime. Banks would maintain their capacity to absorb losses while continuing to provide financial services to households and businesses across a wide range of economic conditions. An important benefit of these proposals is that they would reduce incentives for traditional lending activities—like mortgage origination, mortgage servicing, and lending to businesses—to migrate outside of the regulated banking sector.

In summary, the three proposals before the Board today would meaningfully improve the bank capital framework by addressing duplicative overlaps, matching requirements to actual risk, and comprehensively addressing long-standing gaps in our framework. The result will be more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness and financial stability. Importantly, they will also bring us closer to fulfilling the U.S. commitment to implement the 2017 Basel III agreement and will complete the first step of our comprehensive review of the capital framework. I urge my colleagues to support them.

I will now turn to our new director of the division of supervision and regulation, Randy Guynn, to introduce the staff presentation.

Concluding Statement
I would like to again thank the staff for preparing and presenting the meeting materials to the Board today. This package of reforms is reasonable, based on data and analysis, and takes a broad-based approach to considering capital requirements and their overall calibration and impact.

Capital is a critical pillar of the bank regulatory framework. A strong capital base protects depositors from losses, supports confidence in banks and the broader financial system, and allows banks to operate through economic cycles. Calibration is important, however, over-calibration can harm bank competitiveness and the ability to serve customers, limit the availability of credit, and stifle economic growth. This proposal makes targeted, reasonable changes to better calibrate requirements based on risk. These changes will continue to the promote safety and soundness and U.S. financial stability.

The proposal includes modest deviations from the 2017 Basel agreement. Many of these have only a minor effect on capital but are designed to address U.S.-specific implementation issues. Under U.S. law, bank regulatory requirements cannot rely on external credit ratings in assigning risk weights to loans, whereas no similar restriction applies in many foreign banking markets. The proposal accommodates this unique aspect of the U.S. banking system by providing better risk-based calibration for loans to investment grade borrowers that are not publicly traded. Rather than focusing on whether these deviations are consistent with the international standard, we should ask whether this policy choice is reasonable and whether it aligns capital requirements with risk for U.S institutions.

The Basel Committee recognizes that jurisdictions must have the flexibility to adjust its recommendations to meet their legal frameworks and their unique banking markets. If the Basel Committee demanded blind adherence without any consideration of jurisdictional differences, I would question whether the U.S. should participate in a global body that disregards these essential distinctions. Clearly, in any context, some deviation to accommodate domestic law or banking conditions is the necessary outcome. We should not seek to punish U.S. consumers and businesses by imposing higher costs of credit or forcing credit availability outside of the banking system, particularly if this is done only to show greater alignment with Basel or any other international standard without being tied to actual risk.

I would note that the most significant deviation from the international standard in our Basel III proposal is the elimination of internal models for credit risk, a deviation that results in higher capital charges for U.S. banks as compared to their international peers.

I look forward to receiving public comment on the proposals, including whether they are appropriately calibrated on their consequences for real-world activity. The feedback we receive will be critical in determining whether our approach appropriately balances safety and soundness with credit availability.

Finally, I appreciate the dedication and professionalism our staff have shown in developing this capital package. Your diligent work, perseverance, and collaboration produced a robust and well-supported proposal. Thank you for your contributions and for the essential role you play in this work.