Despite Controversy, Implementation of U.S. Basel III Capital Regime Moves Forward

by Ballard Spahr LLP
Contact

In June 2012, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) issued proposed regulations that would establish a newer, more comprehensive capital framework for U.S. banking organizations by implementing the Basel III capital regime, as modified by U.S. legal requirements mandated by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Certain aspects of these rules met with strenuous objections from the banking industry. This was especially true with regard to application of Basel III standards to community banks. Furthermore, as recently as April of this year, legislation introduced with some fanfare by Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) calls into question the adequacy of Basel III as a response to the recent banking crisis, particularly as regards preventing undue concentration of large financial institutions that are “too big to fail.”

Notwithstanding the vociferousness of the critics, on July 2, 2013, the Federal Reserve promulgated final Basel III capital rules substantially unchanged from those proposed a year ago. The most stringent capital requirements for “advanced approaches banking organizations”—those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures—were kept in the final rules. The only changes of note were those affecting community banks and other small banking organizations. The Board’s action was followed closely by adoption of Basel III rules by the OCC and the FDIC (as an interim final rule). The FDIC has also issued a notice of proposed rulemaking to strengthen the leverage capital ratio.

The U.S. version of Basel III will apply to:

  • All national banks, state member banks, and state nonmember banks
  • All federal and state savings associations
  • Bank holding companies other than those with less than $500 million in consolidated assets, provided they do not:

    - Engage in significant nonbank activities
    - Conduct significant off-balance sheet activities
    - Have a significant amount of SEC-registered debt or equity

  • Savings and loan holding companies (SLHCs), other than:

    - Grandfathered unitary SLHCs with more than half of their assets or revenues in commercial activities
    - SLHCs that are insurance underwriting companies or that have more than 25 percent of their assets in insurance underwriting subsidiaries

  • Any of the above that are subsidiaries of foreign banks

The Board’s Basel III release was approximately 1,000 pages long. In this alert and others to follow, we will cover the key aspects of the final rules, as well as the treatment of community banking organizations.

Even as U.S. regulators uncork their strong capital brew, events at the Bank for International Settlements have also been developing rapidly. At the same time that the Federal Reserve final rules were released, the Basel Committee on Bank Supervision (BCBS) updated its assessment methodology for global systemically important banks (G-SIBs) and issued disclosure requirements. To help banks and participating jurisdictions prepare for the implementation of the G-SIB framework, the BCBS intends to finalize and publish by November 2013 certain elements of the regime. This publication will occur one year in advance of timeline set out in 2011 to enable banks to calculate their scores and higher loss absorbency requirements using year-end 2012 data before the requirements come into effect based on year-end 2013 data.

On July 5, 2013, the BCBS published a set of proposals that would revise the prudential treatment of banks’ equity investments in funds. The proposal’s underlying principle is that banks should apply a look-through approach to identify the underlying assets whenever investing in schemes with underlying exposures such as investment funds. As a full look-through approach may not always be feasible, the BCBS proposes a staged approach based on different degrees of granularity of the look-through. The proposal’s risk weighting framework is designed to enable application of a consistent risk-sensitive capital framework providing incentives for improved risk management practices. Further, the proposal is designed to help address risks associated with banks’ interactions with shadow banking entities.

Finally, on July 19, 2013, the BCBS issued a consultative document on liquidity coverage ratio (LCR) disclosure standards. First introduced in January 2013, the LCR is intended to ensure that a bank has an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario. (The Federal Reserve has notably stolen the march on the BCBS in this regard for U.S. banking organizations and has already begun implementation of rigorous stress testing based on a variety of market conditions). The BCBS believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. To promote consistency and ease of use of LCR-related disclosures, internationally active banks across Basel member jurisdictions will be required to publish their LCR according to a common template. Comments on this consultative document are due by October 14, 2013.

Nor is U.S Basel III regulation likely to remain static for long. When the Board unveiled its final rules, Governor Daniel K. Tarullo issued a statement in which he previewed a considerably more rigorous set of capital requirements for the eight U.S. G-SIBs (Bank of America, Bank of New York/Mellon, Citigroup, Goldman Sachs, J.P. Morgan/Chase, Morgan Stanley, State Street, and Wells Fargo). When added to the Basel III final rules and the Board’s stress testing requirements, these capital requirements could well have a major impact on the cost and availability of credit. We shall discuss these additional requirements if and when they are promulgated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!