Davis Polk partner David Portilla discussed the proposed raise of U.S. capital requirements for banks on Bloomberg Television’s “The Close.”

When asked about the proposed rules’ effects on banks, David noted that there are a few aspects that have a more significant effect on trading operations and businesses that attract fee income as opposed to interest income. “The proposals have something called the operational risk aspect of capital, which will be new in the U.S. and that capital requirement will essentially impose a capital charge on fee income that a bank organization attracts from its asset-light businesses,” David said. “It will be a big part of the discussion about whether these are appropriately calibrated.”

He also explained the differing views on how to calculate risk. David noted that the largest banks currently calculate their capital requirements using two methods – one that uses the bank’s own models to figure out how to capitalize its risks and the “standardized approach,” which uses what the regulators have determined. “This proposal would, for credit risk, eliminate the models-based approach, and whether and how that’s done is a question that everyone will discuss as these proposals are outstanding,” he said.

As for the differences between the two approaches, David explained, “The way it gets discussed often times is the risk of homogeneity in a regulator-set approach where the regulators set it and they’re the only ones thinking about it … and the models-based approach, where you get the benefit of banks looking at things in different ways and diversity of thought and diversity of analysis. The current regulators would say the banks always estimate low.”

He also noted that another issue that has been discussed prominently is how the proposals manage risks. “Those who look skeptically on the proposals would say you’re just pushing risk outside of the banking system, and that’s net-net or worse off for that. I think proponents of the proposals would say that may be the case, but we will have to go find a way to regulate those risks outside the banking system using other tools that are available.”

David mentioned that this process could take awhile and that it may be some time before these proposed rules would go into effect. “There’s a comment period where the public gets to analyze these proposals and give their comments to the regulators. That goes until November 30th, and then it’s going to take awhile for the regulators to sift through all those comments.”

“Bloomberg Markets: The Close,” Bloomberg Television (starting at the 1:41:15 mark) (July 31, 2023)

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