The Fed Finalizes Rules Implementing Basel III

July 11, 2013 at 7:15 pm Leave a comment

On July 2, 2013, the Board of Governors of the Federal Reserve System (the “Board”) approved the final rule implementing enhanced regulatory capital standards for U.S. banking organizations. While many of the capital requirements remained unchanged from the proposed rules released in June of 2012, the Board modified some of the more onerous requirements applying to regional and community banks in response to a barrage of comments to the proposed rules from community banks, industry organizations, and politicians. A few of the particularly significant changes tailored to community banks include:

Extended Period for Community Banks to Comply. The rule allows an additional year for small banks to begin complying with the rule (i.e., community banking organizations have until January 1, 2015 to comply). This extended compliance period should alleviate some of the burden for community banks in complying with the rule.

Revised Definition of Common Equity Tier 1 Capital. The rule grandfathers the regulatory capital treatment of trust-preferred securities issued by certain small banks prior to May 19, 2010, to reduce the amount of capital small banks must raise to comply with the rule.

Opt-Out of Accumulated Other Comprehensive Income. The rule gives small banks an opportunity to make a one-time election not to include most elements of AOCI in regulatory capital, and if this election is made, small banks may use the existing treatment under the general risk-based capital rules. The AOCI opt-out election must be made in the banking organization’s first Call Report or FR Y-9 series report that is filed after the banking organization becomes subject to the rule.

Risk Weighting of Assets. For purposes of calculating risk-weighted assets, the rule permits smaller banks to retain their current treatment for residential mortgage exposures under the general risk-based capital rules.

While the industry is working diligently to implement the rule and address the impact of the rule going forward, some community banking organizations will likely find it difficult to comply with the rule, which is 972 pages in length. To assist community banks in implementing the rule, the Board provided a cheat sheet that highlights how the rule’s new capital standards compare to the current standards. View a copy of the rule and cheat sheet.

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