On July 2, 2013, the Federal Reserve Board, and on July 9, 2013, the FDIC and OCC, adopted a final rule that implements the "Basel III" changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations.
The final rule on Basel III implementation is 972 pages long and consolidates three separate notices of proposed rulemaking issued by the U.S. banking regulators in June 2012. The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule emphasizes common equity tier 1 capital and implements strict eligibility criteria for regulatory capital instruments while also modifying the methodology for calculating risk-weighted assets to enhance risk sensitivity.
In particular, under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to the large and community banks. The final rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new 3% minimum supplementary leverage ratio that takes into account off-balance sheet exposures such as derivatives.
Although not completely exempted from Basel III, the federal banking agencies made a number of changes in the final rule from the originally proposed rule to address concerns about the regulatory burden on community banks. For example, for banks under $50 billion in assets, the final rule excludes the requirement to increase risk-weightings of certain mortgages, and instead incorporates the risk weight for residential mortgages under the existing risk-based capital rules, which either assign a 50% or 100% risk weighting. Community banks may also elect on a one time basis to opt-out out of the onerous requirement to include unrealized gains and losses in regulatory capital. The final rule also counts trust preferred securities as regulatory capital for banks under $15 billion in assets. Overall, the rule provides some important concessions for smaller, less complex financial institutions.
Implementation of the new capital rules for banking organizations under $50 billion in assets will begin on January 1, 2015, while the implementation date for larger institutions begins in January 2014, barring any Congressional action to modify the final rules.