FACTBOX-How US regulators are overhauling bank capital rules

By Pete Schroeder

WASHINGTON, March 19 (Reuters) - U.S. banking regulators on Thursday unveiled sweeping plans to streamline and ease numerous capital requirements for the nation's largest banks, which could free up billions of dollars for lending, dividends and share buybacks.

Top regulatory officials appointed by Republican President Donald Trump say the rules imposed following the 2008 financial crisis have grown to be too onerous and are stifling lending and the economy.

The changes they are proposing to the "Basel III" and "GSIB surcharge" rules, along with tweaks to banks' annual "stress test" health checks, will calibrate capital in line with real risks, while still keeping the financial system safe, they say.

Critics say they will weaken financial system safeguards just as geopolitical and private credit risks are surging.

Here is some of what was proposed on Thursday and how it is estimated to impact existing capital requirements:

BASEL III

The biggest piece of Thursday's proposals is a fresh attempt to implement risk-based capital standards required under the international "Basel" agreement introduced after the crisis.

The U.S. proposal overhauls how large banks gauge their risk, and in turn, how much capital they should set aside as a cushion against potential losses. The main areas of focus are credit risk, market risk and operational risk.

The original 2023 Basel draft led by Bowman's Democratic predecessor Michael Barr proposed raising capital by 16%. Big banks said it could hike their levels by as much as 20%.

Thursday's proposal is much gentler, with Fed officials estimating it would hike capital by just 1.4%, which will be more than offset by related adjustments to other capital levers.

Among the major changes: Thursday's proposal scraps the so-called "dual stack" approach, which would have required big banks to calculate capital under two separate methods and apply the higher of the two. Regulators on Thursday proposed applying a single new calculation method, saying that it will be simpler and more consistent.

The proposal will also allow banks to rely on their own internal models to calculate market risk in some cases, provided they have robust data quality and models, as opposed to regulatory models, which banks argued can be too blunt and punitive.

GSIB SURCHARGE

A second proposal would ease the "GSIB surcharge," an additional layer of capital levied on eight of the nation's globally systemically important banks, via two major changes.

First, the Fed will update calculation inputs, which were fixed around 2015, to account for economic growth. Banks have complained that those "coefficients" are outdated and that as a result the surcharge overstates the banks' footprint in the economy. The Fed proposed automatically adjusting those coefficients alongside economic growth.

A second change would reduce the impact of banks' reliance on short-term wholesale funding in the surcharge calculation. That factor, say Fed officials, has become more influential in the calculation than originally intended.

The Fed also proposed calculating the surcharge based on average daily or monthly financial data, as opposed to the current practice of calculating it at year end.

Fed staff estimates these and other tweaks would reduce capital for the eight GSIB banks by 3.8%.

STANDARDIZED APPROACH

A third proposal would overhaul the "standardized approach" smaller banks use to calculate risk-based capital.

Most notably, in a bid to incentivize banks to do more mortgage lending and servicing, regulators have proposed no longer requiring banks to deduct mortgage servicing assets from their capital. Instead, banks could count those assets as capital, while assigning a 250% risk weight. That change applies to banks of all sizes.

One capital hike facing large regional banks, however, is a requirement that they begin accounting for unrealized losses on their books. That is in response to the 2023 collapse of Silicon Valley Bank, which experienced a rapid outflow of deposits after it reported large unrealized losses following rapid interest-rate hikes. That change will increase capital requirements for those banks by 3.1%, although their capital is expected to fall 5.2% when all pending changes are considered, the Fed said.

Banks with less than $100 billion in assets, though, do not have to comply with that new requirement. Their capital is expected to fall 7.8% under the revised standards.