Over the course of the last week, the Federal Banking Agencies (the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued final rules implementing changes to the capital requirements for bank holding companies (BHCs), savings and loan holding companies (SHLCs) and insured depository institutions (Final Rule). The Federal Reserve unanimously approved the Final Rule at an open meeting on July 2, 2013, and at the same time issued a notice of proposed rulemaking to make conforming changes to the current market risk capital rule (Market Risk NPR). The FDIC approved the rule as an interim final rule on July 9, 2013. The OCC also approved the Final Rule on July 9, 2013.
The Final Rule implements, with some changes, the following three capital proposals issued in June 2012 (collectively, the Proposed Rule):
- Basel III NPR – implementing a new common equity tier 1 (CET1) ratio as well as other increases in the quantity and quality of capital (i.e., the numerator of the capital ratio), as well as updating the prompt corrective action (PCA) requirements to incorporate the higher proposed capital requirements;
- Standardized Approach NPR – implementing changes to how most banking organizations (generally those with less than US$250 billion in assets) determine the risk weighting of their assets for calculation of capital ratios (i.e., the denominator of the capital ratio) that are in line with the Basel II standardized approach, as well as proposing alternatives to credit ratings as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank); and
- Advanced Approaches NPR – revising the advanced approaches capital rule applicable to about 20 of the largest U.S. banking organizations consistent with Basel II and 2.5 as well as Dodd-Frank’s directive to no longer rely on credit ratings in federal rules.
In addition to the Final Rule, the Federal Banking Agencies issued a notice of proposed rulemaking on July 9 to add an “Enhanced Supplementary Leverage Ratio” (Leverage NPR) for the eight banking organizations that are designated as globally systemically important banks (G-SIBs). This additional leverage ratio was mentioned by Federal Reserve Governor Daniel Tarullo as coming in the very near future during his remarks at the July 2 Federal Reserve open meeting. The Leverage NPR proposes to require, beginning January 1, 2018, the eight U.S. G-SIBs to have a 6% minimum leverage ratio (as calculated pursuant to the Basel III agreement to include off-balance sheet items) in order to be well capitalized and an additional 2% buffer in order to make capital distributions.
In broad terms, the Final Rule is largely unchanged from the Proposed Rule. However, some changes were made to the Final Rule primarily to reduce burdens on smaller banks. Most of these changes do not apply to the approximately 20 largest banking organizations that will use the advanced approaches. While concessions were made to ease some burdens for smaller banks, the Final Rule will require adjustments on the part of community banks. All indicators are, however, that this may only be the start of additional capital requirements for the largest banks. With proposals on Capitol Hill such as the bill introduced by Senators Brown and Vitter to move away from the Basel agreement and instead impose a 15% leverage ratio, the Federal Banking Agencies are under pressure to find the right balance to improve systemic stability without being too onerous on smaller banks. This is further evidenced by FDIC Vice-Chair Hoenig’s vote against the FDIC’s interim final rule because he believes the leverage ratio is too low.
For more information, please see our full client update.