Policymakers are simplifying capital rules for large banks. The goal: Make required capital levels for each bank more closely match its risk profile and likely losses under the Fed’s stress tests.
This may greenlight future dividends and buybacks in excess of the amount included in their capital plans without prior approval of the Fed. In the past, banks needed to get the blessing of the Fed before doling out either. Now, instead, banks will be subject to automatic distribution limitations if their capital falls below the Fed's requirements.
Large banks will now be subject to a single, forward-looking, and risk-sensitive capital framework. The simplification would result in banks needing to meet eight capital requirements, instead of the current 13. The changes would increase capital requirements for the largest and most complex banks and decrease requirements for less complex banks.
Fed Governor Brainard, an appointee by President Obama, was not in favor of the Fed’s decision today—saying the changes give a green light for large banks to reduce capital materially, she estimates the new rule will reduce banks' capital by roughly $100 billion or 7 percent for large banks overall.