JD Supra: US House passes bill to reduce capital requirements of FIs

On February 27, the US House of Representatives passed H.R. 4296, which aims to reduce the operational capital requirements imposed on financial institutions. The bill passed with a vote of 245-169. As is typical with deregulatory legislation, only 19 Democrats supported the bill, while only three Republicans voted against it.

H.R. 4296 tightens the circumstances under which federal banking agencies can establish such operational capital requirements. They may only do so if the requirement “(1) is based primarily on the risks posed by a banking organization’s current activities; (2) is appropriately sensitive to the risks posed by such current activities and businesses; (3) is determined under a forward-looking assessment of potential losses that may arise out of a banking organization’s current activities, businesses, and exposures, which is not solely based on a banking organization’s historical losses; and (4) permits adjustments based on qualifying operational risk mitigants.” H.R. 4296, 115th Cong. § 1(a).

The bill is significant because if it is signed into law, banking regulators will have fewer grounds upon which to substantiate an increase the reserve funds banks must maintain, leaving more funds available for banks to conduct lending activities. Moreover, in light of the recent 25 percent reduction in the maximum amount of surplus funds Federal Reserve Banks can maintain, the bill signals the coming of further deregulation in the banking industry, including perhaps a relaxing of Basel III’s capital requirements to Basel II levels. If this should occur, we may see an uptick in capital access and lending activity, which could cause the market to remain bullish for longer than previously anticipated.

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