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Congressional ____
R afesearch Service
Banks' Unrealized Losses, Part 1:
New Treatment in the Basel III Endgame
Proposal
September 1, 2023
On July 27, 2023, the federal banking regulators released a proposed rule that would amend bank capital
rules for banks with over $100 billion in assets. The proposal would implement what is popularly called
the Basel III Endgame, a series of reforms from the intergovernmental Basel Committee on Bank
Supervision. The proposal would make a number of other changes as well, including some responding to
problems raised by the failure of Silicon Valley Bank (SVB) in the spring of 2023. This Insight discusses
how the proposal would change the capital treatment of unrealized losses on the debt securities that banks
hold as assets. Part 2 discusses recent policy concerns with the rapid growth of these unrealized losses at
banks and the role they played in the failure of SVB.
Current and Proposed Capital Treatment
Banks are required to hold capital to prevent their failure in the event of unexpected losses. Capital
requirements are based predominantly on the value of banks' assets, adjusted for some requirements by
the assets' riskiness. Banks generally favor lower effective capital requirements, because capital is a more
expensive form of funding than liabilities, such as deposits or debt. For background, see CRS Report
R47447, Bank Capital Requirements: A Primer and Policy Issues.
In 2012, the banking regulators proposed rules to implement major changes to bank capital requirements
(called Basel III) to address problems that arose during the 2008 financial crisis. The proposal included
a new requirement that banks (and bank holding companies [BHCs]) include most parts of accumulated
other comprehensive income (AOCI) in common equity Tier 1 (CET1) capital, which would have aligned
capital rules with the treatment ofAOCI under generally accepted accounting principles. One component
of AOCI to be included was unrealized capital gains and losses on available for sale (AFS) debt
securities. (Banks classify the debt securities they invest in as either trading, AFS, or held to maturity
[HTM].) Doing so would have the effect of increasing a bank's CETi levels when it has unrealized
capital gains and reducing CETi when it has losses. The regulators argued that unrealized losses could
Congressional Research Service
https://crsreports.congress.gov
IN12231
CRS INSIGHT
Prepared for Members and
Committees of Congress](ViewImageLocal?handle=hein.crs/govemsf0001&div=1&collection=&method=preview&ext=.png&size=3)
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