Financial regulators at the state and federal levels take a number of measures to ensure the financial health of banks, generally through what is referred to as prudential (or safety and soundness) regulation—rules and standards put in place to mitigate risks associated with banking activity. One way that regulators ensure that banks operate in a safe and sound manner is by establishing capital requirements that banks must meet. Bank capital serves a number of important roles: Primarily it serves as a layer of protection against losses, and in doing so it promotes public confidence in banking institutions. Regulators do this in part because when banks fail, the federal government provides a financial safety net to protect depositors and the broader economy from losses. Capital requirements are statutorily mandated, but statute provides the regulators with discretion to set them as “deem(ed) to be necessary and appropriate”—although Congress has occasionally intervened legislatively to modify specific rules or details. Capital rules are set through regulation by the federal bank regulators—the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—and are often modeled off international agreements made by the members of the Basel Committee on Banking Supervision (the most recent agreement being known as “Basel III”), which includes U.S. regulators. Many capital requirements are based on risk-weighted assets (RWA), which base how much capital is required on the riskiness of the bank’s assets, whereas others, called leverage requirements, are generally based on total assets irrespective of the riskiness of those assets. The reason regulators use RWA in addition to total assets is because some assets are inherently riskier than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example, banks held highly rated mortgage-backed securities (MBSs) before the 2008 financial crisis in part because those assets had a higher expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the crisis. Thus, leverage ratios, which are based on balance sheet size rather than risk, can be thought of as a backstop to ensure that incentives posed by risk-weighted capital ratios do not result in a bank holding insufficient capital. However, there are policy tradeoffs in using these two types of requirements. RWAs are more complex and therefore impose greater regulatory burden. For that reason, Congress created an option for qualifying smaller banks to opt out of risk-weighted requirements in 2018 when it created a simplified regime called the community bank leverage ratio (CBLR). Another issue of increasing frequency is that leverage requirements are requiring banks to hold more capital than risk-weighted requirements. This has the disadvantage, some argue, of making capital regulation no longer based on the principle of matching risk with capital. The banking regulators under leadership appointed by President Trump have released a series of proposed and final rules since 2025 that would cumulatively reduce the amount of capital that banks are required to hold on net. The final rules include changes to the CBLR and the enhanced supplementary leverage ratio (eSLR). The proposed rules would change the Global Systemically Important Bank (G-SIB) surcharge, amend the existing capital framework, and implement the “Basel III Endgame.” Regulators can raise or lower required capital in one of two general ways: by changing the ratio of required capital to assets or by changing how banks calculate their RWAs. The eSLR and CBLR rules reduce capital by lowering ratios, whereas the other proposals change RWA calculations. A healthy banking industry is important to the overall economy. To that end, Congress legislates on and conducts oversight of bank regulation, including capital requirements. There is perennial congressional debate about whether capital requirements are too high or low and too simple or complex.
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