The FRB Issues Final Basel III Capital Reform Rule

On Tuesday, July 2, 2013, the Federal Reserve Board (the “FRB”), in coordination with the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC” ), approved a final rule implementing the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The final rule aims to help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.

The final rule consolidates three separate notices of proposed rulemaking that the OCC, FRB, and FDIC published in the Federal Register on August 30, 2012, with selected changes.

The final rule:

• implements a revised definition of regulatory capital, 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 risk-based capital rules, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator;

• incorporates these new requirements into the agencies’ prompt corrective action framework;

• establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements;

• amends the methodologies for determining risk-weighted assets for all banking organizations, and introduces disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets;

• adopts changes to the agencies’ regulatory capital requirements that meet the requirements of Sections 171 and 939A of the Dodd-Frank Act; and

• codifies the agencies’ regulatory capital rules, which have previously resided in various appendices to their respective regulations, into a harmonized integrated regulatory framework.

In addition, the OCC is amending the market risk capital rules to apply to federal savings associations.  The FRB is amending both the advanced approaches risk-based capital rules and market risk capital rules to apply to top-tier savings and loan holding companies domiciled in the United States, except for certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities.  This exception for these savings and loan holding companies is a change from the rules as originally proposed; the FRB plans to take additional time to evaluate the appropriate regulatory capital framework for these entities.

The final rule also differs from the proposed rules in terms of risk weighting for residential mortgages and the regulatory capital treatment of certain unrealized gains and losses and trust preferred securities for community banking organizations.  The final rule provides a phase-in period for larger institutions that will begin in January 2014, and a phase-in period for smaller, less complex banking organizations that will not begin until January 2015.

An OCC press release states that the Comptroller intends to sign the final rule the week of July 8, 2013.  The notice for the FDIC’s July 9, 2013 board meeting, lists the rule as an agenda item for discussion as an interim final rule.

Read the FRB press release

Read the OCC press release

Read the FDIC board meeting notice