On July 2, 2013, the Federal Reserve Board approved a final rule implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision as well as certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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 full text of the final rule, which consolidates three separate notices of proposed rulemaking that the OCC, FRB, and FDIC published in the Federal Register on August 30, 2012, is available here.
Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. 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 all supervised financial institutions. The 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 minimum supplementary leverage ratio that takes into account off-balance sheet exposures.
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.
The federal banking agencies made a number of changes in the final rule from the originally proposed rule, in particular to address concerns about the regulatory burden on community banks. For example, the final rule excludes proposals to increase risk-weightings of certain mortgages, no longer provides for the inclusion of unrealized gains and losses in regulatory capital—at least on an opt-out basis—and 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.
The phase-in period for smaller, less complex banking organizations will begin in January 2015, while the phase-in period for larger institutions begins in January 2014. In another change from the proposal, savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the final rule at this time. The Federal Reserve is continuing to evaluate the appropriate regulatory capital framework for these entities.
The Federal Reserve coordinated the final rule with the FDIC and the OCC, which continue to review this matter. The FDIC will consider the matter as an interim final rule on July 9, 2013. The OCC also expects to review and consider the matter as a final rule by July 9, 2013.