The Proposed Capital Rules: Application to Bank Assets

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Introduction -

The publication on June 7, 2012, of three related capital proposals by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation present myriad issues for a large segment of the U.S. banking industry.

The proposals will require all of the covered banks to revisit a fundamental question: how to use capital most efficiently. The answer will be based partly on the necessary components of capital, but for day-to-day operations, the issue is how particular assets will be treated for capital purposes. The Standardized Approach Proposal deals exclusively with this issue and revamps the risk-weighting process in several respects that could significantly affect the business models of some banks. For example, the treatment of residential mortgage loans has become more granular and effectively penalizes the origination of all but the most conservatively underwritten loans. Banks will see a 50% increase in the weight of their commercial real estate loans unless borrowers provide substantial, up-front equity contributions. Banks that own tranches of securitized mortgages or other assets no longer may use credit ratings to determine risk weights and will be required to apply a more complex analysis. Other changes may seem to be on the margins, including the treatment of credit risk mitigants and conversions of off-balance sheet assets but nevertheless could have substantial impact in particular situations.

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Topics:  Capital Requirements, FDIC, Federal Reserve, Mortgage-Backed Securities

Published In: Administrative Agency Updates, Finance & Banking Updates, Securities Updates

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.

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