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Tuesday, July 2, 2013

Basel III Rule

As reported earlier, the Federal Reserve Board this morning finalized its 972 page rule implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes.

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.

In addition, ABA 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.

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.

Basel III webpage.

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