When the new capital rules were issued this summer, there was no dearth of comment and analysis. The federal banking regulators took pains to emphasize how community bankers were treated and much of the 971 page release parsed the distinctions between “advanced approaches” organizations and community banks.
In general, the basic conclusion is that the community banks could have done much worse, although there are a number of critical concerns that remain. Here is an outline of how some of the important issues under the final Basel III Rules were resolved:
• Accumulated Other Comprehensive Income – Perhaps the most complex aspect of the new rules is an election to opt out of a portion of them. Under the new rules, banking organizations other than the largest banks will have a one-time election to opt out of the requirement to include accumulated other comprehensive income in common equity tier 1 capital. The original treatment proposed for AOCI had been objected to by many small banking organizations in light of the potential for rapid swings – up and down – in regulatory capital. Bankers objected to having to mark debt securities to market and then track the resulting changes to capital. So this was a “win” for smaller banking organizations. It is anticipated that most small banking organizations will make this election. The opt-in is to be made on the 1st quarter call report for 2015. Notwithstanding that election, however, with respect to individual organizations, the bank regulators have reserved the right to require the same treatment of AOCI that applies to larger banks when it is appropriate in the view of the regulators.
• Trust Preferred – Banks under $15 Billion in assets will be allowed to count trust preferred as tier 1 capital. Such treatment has been a goal of many community bank advocates.
• Commercial Real Estate – There is a new risk weight for certain kinds of high risk commercial real estate lending of 150%.
• Residential Mortgages – Residential mortgages were excluded from the risk weighting scheme of the Basel III capital rules.
• Capital Buffers – New capital buffer rules apply to small banking organizations as well as larger banking organizations, notwithstanding complaints from many small community banks. There is a new requirement for a capital buffer to be maintained on top of the minimum capital requirements. In order to be well-capitalized and have no restriction on the amount of earnings that can be distributed, an additional capital buffer of 2.5% must be maintained. This rule will phase in over the period from 2015 to 2019.
• Sub-chapter S banks – Sub-chapter S banking organizations will face some particular problems with respect to distributions in light of the new capital buffer requirements.
• Prompt Corrective Action – The ratios for prompt corrective action have been increased in some cases.
Smaller banking organizations are to comply by January 1, 2015 with the new capital rules while the largest banks must comply by January 1, 2014.
There are a number of good resources on the web for those interested in developing a better understanding of the Basel III rules. The FDIC has issued a video that is worth a look: http://www.fdic.gov/regulations/capital/, and an audio analysis (with various links and other materials) is available from the Independent Community Bankers of America at www.icba.org.