The Banking Agencies’ New Regulatory Capital Proposals

On June 12, 2012 the Federal banking agencies (the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation) (the “Agencies”) formally proposed for comment, in a series of three separate but related proposals (each a “Proposal, and collectively the “Proposals”), substantial revisions to the U.S. regulatory capital regimen for banking organizations that, if adopted, will have a significant impact on the entire U.S. banking industry.1 Based on the core requirements of the 2011 international Basel III Accord (“Basel III”), and in significant part on the “standardized approach” for the weighting and calculation of risk-based capital requirements under the 2004-2006 Basel II Accord (“Basel II”), the Proposals will extend large parts of a regulatory capital regime that was originally intended only for large, internationally active banks to all U.S. banks and their holding companies, other than the smallest bank holding companies (generally, those with under $500 million in consolidated assets).

In addition, the Proposals incorporate aspects of Basel III that would apply only to those banking organizations that are subject to the “advanced approaches” or market risk rules under Basel II, including qualifying Federal and state savings associations and their holding companies. Under U.S. requirements, a banking organization is subject to the advanced approaches rules if it has consolidated assets greater than or equal to $250 billion, or if it has total consolidated on-balance sheet foreign exposures of at least $10 billion. The market risk capital rule currently applies to any bank with aggregate trading assets and trading liabilities equal to 10 percent or more of total assets or at least $1 billion...