Our June Regulatory Watch update reported on 11 new congressional bills and imminent new capital requirements for banks. Intense regulatory activity in the banking sector has continued with significant changes for banks with assets of $100 billion or more announced in late July.
The proposed changes are one of the most sweeping sets of regulatory changes since the 2008 financial crisis and impact approximately 30 of the largest banks, including regional banks.
The proposed rules will change how capital requirements are calculated with respect to activities such as lending, trading, valuing derivatives, and operational risk. Internal models for lending and operational risk will need to be replaced with standard requirements for all banks with over $100 billion in assets. As a sign of needing higher standards, regulators are proposing that two different methods be utilized to calculate risk and each bank must use the higher of the two for capital requirements. Regulators believe these changes are necessary for banks to have the foundation necessary “to be resilient to a wide range of stresses today and into the future”, according to acting OCC head Michael Hsu.
While the overall increase in capital required will vary by bank, the biggest impact will be on the largest banks. The largest 8 banks will have an average increase of 19% in capital requirements. Smaller regional banks between $100 and $250 billion which have previously been exempt from more stringent requirements, will have an average increase of 5% in capital requirements.
US banking leaders are pushing back, pointing to the differences in US regulations vs. foreign bank capital requirements. Kevin Fromer, CEO of Financial Services Forum, said “No other jurisdiction is likely to adopt the approach proposed today.”
While most banks have the capital required to meet the new requirements according to regulators, they will have until July 2028 to be fully compliant. Even though regional banks have a smaller delta to reach, they may be less prepared to meet the requirements. Since 2019, banks under $250 billion did not have to include unrealized losses and gains on securities in their calculations on capital ratios. Regulators believe this “loophole” helped cover issues in Silicon Valley’s Bank balance sheet.
Banks may have years to prepare for these new regulations, but there’s no doubt regulators are watching capital requirements and risk management practices now. Regulators are expecting more bank-level visibility, liquidity testing, and integrated modeling. Uncontrolled spreadsheets are often the biggest source of risk management for financial institutions.
Integrating Excel-based data models into a single interoperable platform can help banks take a more proactive approach to risk management before the new requirements go into place. And this doesn’t have to mean a multi-year digital transformation. Banks can take an incremental approach to modernizing systems.
Solutions like Coherent Spark can help banks gain regulatory control by enabling them to convert, control, and connect their spreadsheets in an integrated environment - in minutes, not months. This not only enhances risk management, but also provides robust governance, control, and audibility.
With Spark, your teams can retain the flexibility of Excel to build complex logic, but eliminate the inherent weaknesses. Analysts can build, model, and test directly in the Coherent platform with regression and analytics tools that are completely traceable, or connect the workflows to a broader, cloud-based integrated solution.
Regulators want visibility, control, and transparency for business-critical processes. Connect with the Coherent team to learn how your team can turn legacy spreadsheet models into enterprise-wide code and transform risk into opportunity.