Conference of State Bank Supervisors Issues Public Comment to 3 Agencies

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WASHINGTON, Feb. 2 -- The Conference of State Bank Supervisors has issued a public comment to three agencies. The comment was written on Jan. 16, 2024, and posted on Jan. 24, 2024.

The comment was signed by Karen K. Lawson, Executive Vice President, Policy and Supervision.

The comment, on Docket No. OCC-2023-0008-0021, was sent to the Chief Counsel's Office, Office of the Comptroller of the Currency; Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System; and James P. Sheesley, Assistant Executive Secretary, Federal Deposit Insurance Corporation.

Here are excerpts:

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The Conference of State Bank Supervisors ("CSBS")/1 provides the following comments on the Notice of Proposed Rulemaking ("NPR," "proposal," or "proposed rule") issued by the Federal Deposit Insurance Corporation ("FDIC"), the Board of Governors of the Federal Reserve System ("FRB"), and the Office of the Comptroller of the Currency ("OCC") (collectively, the "agencies") titled Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity./2 The proposal...

1 CSBS is the nationwide organization of banking and financial regulators from all 50 states, the District of Columbia, and the U.S. territories. State regulators supervise state-chartered banks, as well as nonbank financial services providers such as mortgage companies and money services businesses. Created in 1902, CSBS has for more than a century given state regulators a national forum to coordinate supervision and develop policy, provide training to state banking and financial regulators, and represent its members before Congress and federal financial regulatory agencies.

2 OCC, FRB & FDIC, Proposed Rule, Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity, 88 Fed. Reg. 64028 (September 18, 2023). Available at: https://www.govinfo.gov/content/pkg/FR-2023-09-18/pdf/2023-19200.pdf.

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...would implement the final elements of the internationally agreed upon Basel III capital standard/3 ("Basel standard") and alter many other key aspects of the existing regulatory capital framework for banking organizations with total assets of $100 billion or more ("large banking organizations," "LBOs," or "covered firms").

State regulators have long supported strong capital requirements, particularly for the largest U.S. banks. Unfortunately, the proposal is overly and unnecessarily complex, abandons appropriate regulatory tailoring, and could ultimately undermine U.S. banking industry diversity and financial stability. The agencies also have failed to adequately justify key design features of the proposed capital rule and explain meaningful deviations from the Basel standard. Moreover, the proposal was developed and issued with a flawed rulemaking process that undermines sound public policy and conflicts with various statutory notice-and-comment requirements.

Comments on the proposal are organized as follows:

Part I of the letter addresses state regulators' high-level views of the proposal, including:

* An appropriately tailored prudential framework is foundational to a diverse U.S. banking industry, economic growth, and financial stability, and therefore the proposal should generally not apply to Category III and IV LBOs.

* The proposed capital reforms would undermine banking industry diversity and financial stability by encouraging further industry consolidation and concentration, while accelerating a migration of financial activity out of the banking sector.

* Post-crisis regulatory reforms have led to a stronger, better capitalized banking system, and the agencies have failed to adequately justify substantially higher levels of capital mandated under the proposal.

* The proposal was developed and issued in a flawed manner that is at odds with sound public policy principles and statutory notice-and-comment requirements.

Part II of the letter provides more targeted recommendations related to numerous provisions of the NPR, including:

* the dual-requirement structure for LBOs;

* the definition of capital;

* credit risk;

* operational risk;

* securitization risk;

* equity risk; and,

* market risk.

3 Basel Committee on Banking Supervision, Basel III: Finalising Post-Crisis Reforms (December 2017) ("BCBS Basel III"). Available at: https://www.bis.org/bcbs/publ/d424.pdf.

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III. Conclusion

Strong capital requirements are foundational to promoting the safety and soundness of individual banks and the broader banking system. However, state regulators are concerned that the agencies' proposed capital rule would introduce unnecessary complexity, reject regulatory tailoring, and diminish U.S. banking industry diversity and financial stability. Moreover, the agencies have developed and issued the proposal without providing critical data or rationale that justifies its design, including notable deviations from both the Basel standard and current U.S. capital framework that appear designed to significantly raise capital requirements.

State regulators encourage the agencies to generally limit the scope of application of any final rule to Category I and II LBOs, while making significant revisions to the proposal to limit unintended consequences and undesirable outcomes. Furthermore, state regulators request that the agencies publish an updated economic analysis following the conclusion of its supplemental data collection, and then provide the public with another opportunity to comment before proceeding to a final rule.

Sincerely,

/s/

Karen K. Lawson

Executive Vice President, Policy & Supervision

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Original text here: https://downloads.regulations.gov/OCC-2023-0008-0198/attachment_1.pdf