July 9, 2013 –
Federal Reserve Board approves Basel III accord; community banks spared (for now)

On July 2, 2013, the Federal Reserve Board (FRB) approved sweeping new capital standards for the nation’s biggest banks, 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 Final Rule).

According to the FRB, the Final Rule will ensure that 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. Essentially, the Final Rule minimizes the “burden on smaller, less complex financial institutions and establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements, particularly for larger, internationally active banking organizations, which became apparent during the recent financial crisis.”

The Final Rule increases the minimum requirements for both the quantity and quality of capital held by banking organizations, each consistent with the Basel III reforms. With regard to quantity of capital, the Final 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. It 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.

With regard to the quality of capital, the Final Rule emphasizes common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. According to the FRB, the Final Rule also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity.

For community banks, the FRB reports that the changes from current regulations target a few areas that are higher risk, but are otherwise minimal. In so doing, the FRB emphasizes that nine out of 10 financial institutions with less than $10 billion in assets would meet the common equity tier 1 minimum plus buffer of 7 percent in the final rule, according to data from March 2013. More importantly, as with all financial institutions subject to the Final Rule, community banks will have a significant transition period to meet the new requirements.

Notably, savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the Final Rule at this time. Instead, the FRB has indicated that it will take additional time to evaluate the appropriate regulatory capital framework for these entities.

The FRB coordinated the Final Rule with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which continue to review this matter. The FDIC has provided notice that it will consider the matter as an interim final rule on July 9, 2013. The OCC expects to review and consider the matter as a final rule by July 9, 2013.

In closing, the larger banking organizations will have to comply with the Final Rule at the beginning of 2014 and, as such, should begin to analyze and review whether its current capital positions match up with the new requirements as soon as possible. And while the phase-in period for smaller and less complex banking organizations will not begin until January 2015, these banks should take a proactive approach to this analysis.

If you have any questions with regard to the Final Rule, please contact a member of Gunster’s Banking and Financial Services team.

For more information:

• Read the Federal Register notice containing the Final Rule.
• Read the Federal Reserve Board’s Community Bank Guide, detailing the implications for community banking organizations.