Piper Sandler has prepared a report that examines the Basel III Endgame and TLAC. View the full report.

The Federal Reserve, OCC, and FDIC (the Agencies) have proposed major changes to the current Basel III capital rules (Basel III Endgame or B3E). This rulemaking replaces the existing Advanced Approaches risk weighted assets (RWA) framework applicable to large banks with a new Enhanced Risk-Based (ERB) framework and requires that banking organizations with $100 billion or more in assets or currently subject to Category III and IV standards calculate their regulatory capital using the more stringent requirements that apply to Category I and II banking organizations. A third key regulatory change was the proposal to extend the long-term debt (LTD) and clean bank holding company (BHC) requirements of the existing total loss absorbing capacity (TLAC) rule for all large banking organizations with $100 billion or more in assets.

These proposed B3E and TLAC rules will directly impact 34 institutions consisting of 26 U.S. top tier BHCs and eight intermediate holding companies of foreign banking organizations that comprise the majority of U.S. banking assets, liabilities and equity. The Agencies estimate that these institutions would collectively need to increase CET1 by 16% and total RWAs would increase by 20%. In addition, the impacted banks would need to raise approximately $250 billion in long-term debt. Taken together these requirements could negatively impact the U.S. economy and our competitive position in relation to global banking organizations. As a result, the comment period was extended to January 16, 2024.  

The proposed B3E rules and TLAC requirements may be revised before final implementation, but preliminary thoughts on likely challenges and opportunities for regional and community banks and non-banks include the following:

Challenges for Regional and Community Banks and Non-Banks
•    Economic Impact of Higher Large Bank Capital Requirements  
•    Loan Pricing Competition on Lower LTV SFR Loans  
•    Loan Pricing Competition on C&I Loans for Public Companies 
•    Higher Hedging Costs   
•    Reduced Liquidity and Market Value for Investment in UFIs and MSAs
•    Higher Costs for Operating Services  

Opportunities for Regional and Community Banks and Non-Banks
•    Higher LTV and Cash Flow Dependent SFR Lending 
•    Higher LTV and Cash Flow Dependent CRE Lending 
•    Higher LTV LMI Lending 
•    C&I Lending to Private Companies 
•    Operational Services
•    MSR and UFI Investment 
•    High RWA Lending Under CBLR Framework  
•    Credit Risk Transfer Investment 

As large banks shift their lending priorities to lower RWA lending opportunities or perhaps cut back on their operational services, smaller banks and non-banks may have a significant opening to pick up these activities. The details will matter in sorting through the final rules to determine which changes will be made. It is clear that the Agencies want to reduce credit risk and operating risk borne by large banks in the U.S. The question is whether regional and community banks along with non-banks will be able to pick up the lending capacity and operating services capacity to fill the void or whether the U.S. economy and U.S. consumers will suffer as a result. Overall, we worry that adopting the B3E proposals and TLAC requirements before there has been proper consideration of the cumulative impact of additional CET1 and long-term debt requirements on the cost and availability of credit for U.S. consumers and businesses may be counter-productive to the laudable regulatory goals of enhancing financial stability and resiliency.