Should Banks’ Capital Requirements be Based on Current Risks, Not Just Past Losses? (H.R. 4296)

What is H.R. 4296?

(Updated April 12, 2018)

This bill would prohibit federal banking agencies from establishing an operational-risk capital requirement (i.e. money & non-cash assets that have to be held in reserve) for banks unless the requirement: 1) is based on, and is appropriately sensitive to, current risks; 2) is determined under a forward-looking assessment of potential losses — rather than only considering historic losses current law; and 3) allows certain adjustments.

Argument in favor

Bank regulators should only impose risk capital requirements on banks that are based on current risks and a forward-looking assessment of potential losses, rather than historic losses.

Argument opposed

This bill would diminish, rather than strengthen, the incentive for megabanks to maintain stronger internal controls and risk management systems to prevent their failure.

Impact

Financial institutions; and financial regulators.

Cost of H.R. 4296

The CBO estimates that enacting this bill would increase the deficit by $22 million over the 2018-2027 period due to $26 million in direct spending and an increase of $4 million in revenues.

Additional Info

In-Depth: Sponsoring Rep. Blaine Luetkemeyer (R-MO) introduced this bill to set parameters for federal financial regulators when establishing operational risk capital requirements:

“Operational risk capital requirements were first agreed to at the Basel Committee and then implemented in the United States by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Reserve. Like many concepts created by the Basel Committee, the original intent may have been authentic but the implementation has brought about unintended consequences. My legislation will instill confidence by instituting clear guardrails for operational risk capital requirements that focus on an institution’s current activities and businesses. I thank my colleagues in the House Financial Services Committee for supporting this legislation and working to ensure capital standards are effective and appropriately tailored.”

Some House Democrats opposed this bill, with several explaining their opposition to what they’ve dubbed a “big bank giveaway” in the bill’s committee report:

“According to bank regulators and the Treasury Department, efforts have been underway internationally to make administrative and technical refinements to the operational risk capital requirement, and we should expect changes in the near future. Congress should closely monitor these developments to see if regulators strike the right balance, and if not, then consider a legislative response. Thus, H.R. 4296 is premature and possibly short-sighted to enact statutory conditions regarding the operational risk capital requirement. This framework would diminish, instead of strengthen, the incentive for megabanks to maintain stronger internal controls and risk management systems.”

This legislation passed the House Financial Services Committee on a 43-17 vote and has the support of two cosponsors, including one Democrat and one Republican.

Media:

• Sponsoring Rep. Blaine Luetkemeyer (R-MO) Press Release
  
• CBO Cost Estimate
  
• Republican Policy Committee
  
• Bureau of National Affairs