On January 26, 2024, the US federal banking regulators announced proposed reporting changes to implement the Basel III Endgame requirements.1 This may come as a surprise to the many banking organizations and others, who only last week submitted comment letters on the proposed Basel III Endgame requirements.
The proposed line edits to the reporting forms have not been released, as of the publication of this Legal Update, but are expected to be published on the FFIEC’s website in the coming weeks. The public will have until March 26, 2024 to comment on the proposed changes. In this Legal Update, we discuss the initial information released regarding these proposed reporting changes.
Background
Banking organizations are required to file several types of reports with their regulators, including those with respect to the bank’s capital adequacy.2 Almost all banking organizations file periodic reports regarding their financial condition that include detailed calculations of their capital instruments, credit risk exposures, risk weighted assets, and capital ratios, collectively known as the Consolidated Reports of Condition and Income (“call report”). Certain larger banking organizations file additional reports related to market risk, operational risk, and additional calculations for credit risk.
In July 2023, the federal banking regulators issued a proposal to significantly revise the risk-based regulatory capital requirements for certain midsize and larger US banking organizations (the “Capital Proposal”). The voluminous Capital Proposal encountered strong criticism from the banking industry, Capitol Hill, and others. The comment period on the Capital Proposal closed on January 16, 2024, and regulators announced their intent to solicit further public comment on the economic impact of the Capital Proposal.3 Many have assumed that the Capital Proposal would be further revised, based on the recently submitted and future feedback.
January 2024 Proposal
Reporting requirements would clearly need to be revised to implement a final rulemaking that changes the regulatory capital requirements. However, it is somewhat unexpected to see the proposed reporting requirements published before regulators have had a chance to consider the comments on the Capital Proposal.
The announcement of the proposed reporting requirements states that the call reports would be revised to align the calculation of regulatory capital for banking organizations subject to Category III and IV standards with the calculation used for organizations subject to Category I and II standards.4 This most likely refers to the parts of the Capital Proposal that would require all banking organizations with $100 billion or more in total assets to (i) account for unrealized losses and gains in their available-for-sale securities, and (ii) apply the capital and total loss absorbing capacity holdings deductions and minority interest treatments when calculating regulatory capital.
The changes to the additional reports related to credit risk, market risk, and operational risk at certain larger banking organizations would be more extensive.
The FFIEC 101, which is used by larger banking organizations to report regulatory capital items for credit and operational risk, would be overhauled to reflect the proposed expanded risk-based-approach framework for calculating risk-weighted assets and the expansion of the supplementary leverage ratio requirement.5 Most of the schedules to the Form 101 would be replaced with new content that mirrors the Capital Proposal, and a new schedule would be added to incorporate the proposed requirements for credit valuation adjustment risk.
The FFIEC 102, which is used by banking organizations to report regulatory capital items for market risk, would have its scope expanded to address the proposed thresholds in the Capital Proposal. The content of the FFIEC 102 would be entirely replaced with new line items that align with the proposed standardized requirements for market risk, models-based requirements for market risk, and calculation of market risk-weighted assets.
A new reporting form, the FFIEC 102a, would be required from some banking organizations. This form would—unlike most of the call reports, FFIEC 101, and FFIEC 102—be confidential information that is not released to the public. Only banking organization that calculate market risk capital requirements under the models-based measure for market risk would be required to file this form. It would include granular information on trading desks, backtesting of models, and profit and loss data.
Conclusion
The proposed reporting requirements assume a July 1, 2025 implementation date for the Capital Proposal and state that the new reporting requirements would be effective for the third quarter of 2025 (i.e., after the September 30, 2025 reporting date). They also note that, if modifications are made to the Capital Proposal in an associated final rule, the regulators would modify the reporting requirements to incorporate such changes. While this is a welcome recognition of the ongoing review of the Capital Proposal, it does raise the question of why banking organizations are being asked to comment on proposed reporting requirements that most likely will be changed to reflect the extensive work that is needed on the Capital Proposal.
The proposed reporting requirements indicate that the expected per-organization burden for completing the FFIEC 101 would decrease from 674 hours per quarter to 437 hours per quarter. In contrast, the quarterly burden for the FFIEC 102 (including the new FFIEC 102a) would increase from 12 hours to 93 hours. As many know, these estimates tend to dramatically understate the reporting burden for most organizations.
1 89 Fed. Reg. 5297 (Jan. 26, 2024), https://www.federalregister.gov/documents/2024/01/26/2024-01532/proposed-agency-information-collection-activities-comment-request. The US federal banking regulators consist of the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”), and Federal Deposit Insurance Corporation (“FDIC”).
2 These reports roughly parallel the Basel Committee on Banking Supervision’s disclosure standard. BCBS, DIS (Jan. 1, 2023), https://www.bis.org/basel_framework/standard/DIS.htm?tldate=20240126.
3 E.g., Kyle Campbell, Regulators will take comments on Basel III endgame impact analysis, American Banker (Jan. 9, 2024).
4 The proposed reporting requirements do not address the holding company analogue to the call report, the FR Y-9C. The Federal Reserve already previewed these changes in 2023. See 88 Fed. Reg. 64,028, 64,177 (Sept. 18, 2023).
5 Banking organizations also would be required to provide a breakout of derivative transactions that involve commercial end-users and counterparties other than commercial end-users.
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