The Basel Capital Accords

The work by the Basel Committee on Banking Supervision (BCBS) on the first Basel Capital Accord, Basel I, provided an international consensus framework for bank safety and soundness regulation. In a further response to the financial crisis, the Basel III regulatory framework reforms Basel II by revising the definition of regulatory capital and increasing the amounts banks must hold, among other requirements. The requirements and phase-in schedules for Basel III were approved by the 27 member jurisdictions and 44 central banks and supervisory authorities on September 12, 2010. Basel III compliance requires banks to satisfy the enhanced requirements by 2019. The federal banking regulators issued a proposed rule on June 7, 2012; the final rule to implement most of the Basel III recommendations in the United States was approved by July 9, 2013. Enhanced Safety and Soundness Requirements Under Dodd-Frank

The Basel III final rule adopted by the U.S. federal banking regulators also implements some provisions from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203 ), which also addressed capital reserve requirements for banks. Regulators were required to find other appropriate standards by which to determine the financial risks of bank portfolio holdings while enforcing the mandatory capital requirements, and they must also transmit reports to Congress that contain descriptions of all regulatory modifications made pursuant to the section. Section 171: The Collins Amendment

The Collins Amendment of Dodd-Frank provides for the development of consistent capital requirements for all insured depository institutions, depository institution holding companies, and systemically important non-bank financial companies. Appendix C discusses the increase in stress testing requirements for all U.S. banks, which are likely to result in banks holding levels of required capital that exceed the minimum ratio compliance thresholds. The leverage ratio requirements for U.S. banks appear below. On April 8, 2014, the U.S. federal banking regulators issued a final rule that would add an additional capital buffer of at least 2% to the current supplementary leverage ratio of 3% for banks with more than $700 billion in total consolidated assets or $10 trillion in total assets, thus raising the total supplementary leverage ratio requirement to a 5% minimum. Do Higher Capital Requirements Curb Lending, (Systemic) Risks, or Both? Higher capital requirements can reduce vulnerability of banking institutions to insolvency (failure). Furthermore, under circumstances when a bank failure is unavoidable, higher capital may reduce the size of claims or perhaps the need to draw from the deposit insurance fund that is maintained by the Federal Deposit Insurance Corporation, thus avoiding possible taxpayer losses. Bank capital levels may also become more misleading or less effective at mitigating financial risks when a significant amount of lending occurs outside the regulated banking system. When large amounts of lending activity occur in parts of the financial system that are not regulated for safety and soundness, raising capital requirements for depository institutions would not necessarily address the rise in the various types of financial risks in the economy. On October 9, 2012, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation separately announced final rules requiring national banks and federal savings associations with total consolidated assets of $10 billion or more to conduct annual stress tests; the Federal Reserve released its final rule on October 12, 2012.
The Basel III international regulatory framework, which was produced in 2010 by the Basel Committee on Banking Supervision at the Bank for International Settlements, is the latest in a series of evolving agreements among central banks and bank supervisory authorities to standardize bank capital requirements, among other measures. Capital serves as a cushion against unanticipated financial shocks (such as a sudden, unusually high occurrence of loan defaults), which can otherwise lead to insolvency. The Basel III regulatory reform package revises the definition of regulatory capital and increases capital holding requirements for banking organizations. The quantitative requirements and phase-in schedules for Basel III were approved by the 27 member jurisdictions and 44 central banks and supervisory authorities on September 12, 2010, and endorsed by the G20 leaders on November 12, 2010. Basel III recommends that banks fully satisfy these enhanced requirements by 2019. The Basel agreements are not treaties; individual countries can make modifications to suit their specific needs and priorities when implementing national bank capital requirements.
In the United States, Congress mandated enhanced bank capital requirements as part of financial-sector reform in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203, 124 Stat.1376). Specifically, the Collins Amendment to Dodd-Frank amends the definition of capital and establishes minimum capital and leverage requirements for banking subsidiaries, bank holding companies, and systemically important non-bank financial companies. In addition, Dodd-Frank removes a requirement that credit ratings be referenced when evaluating the creditworthiness of financial securities. Instead, the U.S. federal banking regulators (i.e., the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) are required to find other appropriate standards by which to determine the financial risks of bank portfolio holdings when enforcing the mandatory capital requirements.
This report summarizes the higher capital requirements for U.S. banks regulated for safety and soundness. The U.S. federal banking regulators announced the final rules for implementation of Basel II.5 on June 7, 2012, and for the implementation of Basel III on July 9, 2013. On April 8, 2014, the federal banking regulators adopted the enhanced supplementary leverage ratio for bank holding companies with more than $700 billion of consolidated assets or $10 trillion in assets under custody as a covered bank holding company. Although higher capital requirements for most U.S. banking firms may reduce the insolvency risk of the deposit insurance fund, which is maintained by the Federal Deposit Insurance Corporation, they arguably could translate into more expensive or less available bank credit for borrowers. Whether higher capital requirements would result in a reduction of overall lending or systemic risk remains unclear. Prior to the financial crisis, banks maintained capital levels that exceeded the minimum regulatory requirements, yet the economy still saw widespread lending. Bank capital reserves also may have limited effectiveness as a systemic risk mitigation tool if a significant amount of lending occurs outside of the regulated banking system. For an introduction to some of the topics covered in this report, see CRS Report R43002, Financial Condition of Depository Banks, by [author name scrubbed].