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Fed finalizes Basel III capital rules

The Federal Reserve Board on Tuesday finalized its rule implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The rule reflects in several important ways the significant input from thousands of ABA member banks and all of the state bankers associations, with important improvements from the original proposal.

The 972 pages of the complex rule will require careful review and analysis by ABA staff and consultation with ABA members over the coming days and weeks. “Basel III exists because Basel I and II didn't get it right,” said ABA President and CEO Frank Keating. “For that reason, we shouldn't expect this rule to be perfect either -- it's clear that more needs to be done.”

Keating also stated his appreciation for “regulators' efforts to create a rule that focuses on adequate amounts of high-quality capital, which is really what Basel III is all about. The real test for Basel III is whether the rule makes it easier or more difficult for banks to serve their customers.”

Many of the improvements in the final rule are intended to ease the burden on many institutions, particularly on community banks. The following are some of the more notable provisions, based upon initial examination of the text and discussion at the board meeting.

The rule sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier 1 ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier 1 capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. These levels are unchanged from the proposed rule.

The Fed addressed several major concerns raised by ABA and its members. In particular, the risk weights for residential mortgage loans that apply under current rules will continue to apply. Also, those banking organizations with less than $15 billion in assets may continue to count existing trust preferred securities as capital, consistent with the grandfathering set by the Dodd-Frank Act. ABA had been particularly vocal about the initial plan to require a phase-out of TruPS for all banks, creating a capital crisis for many community banks that would have had trouble replacing their TruPS with new sources of capital.

ABA also raised major concerns about the original plan to require banks to recognize in their capital the value of unrecognized gains and losses in “available for sale” securities. That proposal would place banks in the position of facing major hits to capital when interest rates rise, as they have already begun to do, just when the economy is emerging from recession.

The final rule addresses this problem, but only in part. Most banks will be able to choose whether or not to adopt this treatment of their unrecognized gains and losses, while large internationally active banks will be required to do so, reducing but not removing the likely negative impact on the overall economy as bank capital contracts.

No material changes were made from the original plan with respect to the treatment of mortgage servicing assets, which must be deducted from capital under the rule. Also, no relief was afforded savings and loan holding companies with assets less than $500 million from the capital rule. The Fed declared that more work with regard to these firms remained to be done.

The Office of the Comptroller of the Currency is expected to finalize its companion rules by July 9. The FDIC has scheduled a board meeting for the same day to approve its Basel III rules. The FDIC has announced that, at the same meeting, it will release a proposal for a capital “supplementary leverage ratio” for certain banks and holding companies, but no further details were provided.

“Today's rule is the latest -- but not the final -- step in an ongoing process to find the optimal capital regime for the U.S. economy,” Keating said. “During Basel III's implementation period, the door is open for regulators to make the necessary adjustments to ensure the rule works for banks of all sizes and doesn't impede economic growth.”

ABA will carefully evaluate the final rule and update its Basel III webpage with additional materials to assist bankers in understanding and implementing the rule. Aspects of the rules that significantly interfere with the ability of banks to serve their customers in a safe and sound manner will be the subject of further ABA advocacy efforts.

Read the final rule
Read the Fed's staff memo
Read the Fed's guide for community bankers
Read the OCC statement
Read Keating's statement

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