The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are seeking comment on three notices of proposed rulemaking (NPRs) that would revise and replace the agencies’ current capital rules. The agencies also announced the finalization of the market risk capital rule that was proposed in 2011. The Board took its action late last week, while the FDIC and OCC took action this week. Reportedly, the agencies were under pressure to issue the rules prior to the June G-20 summit in Los Cabos, Mexico, which will be attended by President Obama and Treasury Secretary Geithner, particularly in light of a recent Basel Committee on Banking Supervision progress report that found deficiencies in how Basel III was being adopted by the 27 member countries, including the United States. In addition, Thomas Hoenig and Jeremiah Norton, the two newest directors on the FDIC board, voiced concerns about the complexity of the risk-based capital rule proposal and the potential insufficiency of the leverage rule proposal, the latter of which both believed should be higher.

In the first Basel III NPR, "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions" (Basel III NPR), the agencies are proposing to revise their risk-based and leverage capital requirements consistent with agreements reached (Basel III) by the Basel Committee on Banking Supervision (BCBS). The Basel III NPR would apply broadly to all insured banks and savings associations, top-tier bank holding companies domiciled in the United States with more than $500 million in assets, and savings and loan holding companies that are domiciled in the United States. Provisions of this NPR that would apply to these banking organizations include implementation of a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for banking organizations subject to the advanced approaches capital rules, a supplementary leverage ratio that incorporates a broader set of exposures. Additionally, consistent with Basel III, the agencies propose to apply limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified “buffer” of common equity tier 1 capital in addition to the minimum risk-based capital requirements. The proposals in this NPR and the Standardized Approach NPR would apply to all banking organizations that are currently subject to minimum capital requirements (including national banks, state member banks, state nonmember banks, state and federal savings associations, and top-tier bank holding companies domiciled in the United States not subject to the Board’s Small Bank Holding Company Policy Statement (12 CFR part 225, Appendix C)), as well as top-tier savings and loan holding companies domiciled in the United States (together, banking organizations). The Basel III NPR also includes transition provisions for banking organizations to come into compliance with its requirements. The Basel III NPR also would revise the agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity. Prompt corrective action is an enforcement framework that constrains the activities of insured depository institutions based on their level of regulatory capital.

In the second Basel III NPR, “Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rules; Market Risk Capital Rule” (Advanced Approaches and Market Risk NPR), the agencies are proposing to revise the advanced approaches risk-based capital rules consistent with Basel III and other changes to the BCBS’s capital standards. Additionally in this NPR, the OCC and FDIC propose that the market risk capital rules apply to federal and state savings associations, and the Board proposes that the advanced approaches and market risk capital rules apply to top-tier savings and loan holding companies domiciled in the United States, if stated thresholds for trading activity are met. Generally, the advanced approaches rules would apply to such institutions with $250 billion or more in consolidated assets or $10 billion or more in foreign exposure, and the market risk rule would apply to savings and loan holding companies with significant trading activity. As described in this NPR, the agencies also propose to codify their regulatory capital rules, which currently reside in various appendices to their respective regulations.

In the third capital NPR, “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” (Standardized Approach NPR), the agencies propose to "revise and harmonize" rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the Basel II standardized framework, and alternatives to credit ratings, pursuant to section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The revisions include methods for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk. The Standardized Approach NPR would apply broadly to the same set of institutions as the Basel III NPR. The NPR also would introduce disclosure requirements that would apply to U.S. banking organizations with $50 billion or more in total assets. The changes in the Standardized Approach NPR are proposed to take effect on January 1, 2015, with an option for early adoption.

Comments on the three proposed rules are due by September 7.

The final market risk rule amends the calculation of market risk to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions. The market risk capital rule supplements both the agencies’ general risk-based capital rules and the advanced capital adequacy guidelines by requiring any bank subject to the market risk capital rule to adjust its risk-based capital ratios to reflect the market risk in its trading activities. The final rule applies to a banking organization with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more, but would not apply to savings associations or savings and loan holding companies until such time as the agencies’ were to finalize their proposal to expand the scope of their market risk capital rules. According to the agencies, the most significant change from the proposal relates to the methods for determining the capital requirements for securitization positions. Specifically, under the final rule the mechanism to calculate the capital charges on securitization exposures when the underlying pool of assets demonstrates credit weakness "was altered to focus on delinquent exposures rather than on cumulative losses. This change has the effect of imposing greater capital requirements on the more subordinate tranches in a securitization. Under the proposal, when the underlying pool of assets demonstrates credit weakness, increased capital requirements would have applied to the entire range of outstanding securities, including the most senior tranches in a securitization." The final rule will be effective on January 1, 2013.

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