The First Signs of Regulatory Capital Relief for Most Banks
The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) have jointly announced a proposed rulemaking that would extend the existing transitional periods for certain regulatory capital deductions and risk weights (Proposed Rule). The proposed extension would apply to banking organizations that are not subject to the advanced approaches capital rules, which generally means those banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Significantly, the Agencies state that the Proposed Rule is being issued in preparation for a forthcoming proposal that would “simplify the regulatory capital treatment of these items.”
For these non–advanced approaches banking organizations, the Agencies propose to extend the current regulatory capital treatment of
- mortgage servicing assets (MSAs);
- deferred tax assets (DTAs) arising from temporary differences that could not be realized through net operating loss carrybacks;
- significant investments in the capital of unconsolidated financial institutions in the form of common stock;
- nonsignificant investments in the capital of unconsolidated financial institutions;
- significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock; and
- common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital rules’ minority interest limitations.
Under the revised US regulatory capital rules issued in 2013, starting on January 1, 2018, these items are subject to capital treatment requirements that are intended to exclude or limit the amounts of these items that count toward regulatory capital (in particular tier 1 capital). Community banks, among others, have been vocal in pursuing relief from some of these more stringent capital requirements and the associated regulatory burden, complexity, and costs associated with the new capital rules, and the Agencies have undertaken various initiatives to understand and respond to such concerns.
The Agencies announced in March 2017 that, as part of an FFIEC Report to Congress on their required periodic review of regulations under the Economic Growth and Regulatory Paperwork Reduction Act (EGPRA), they are in the process of developing proposed changes in the capital rules that are intended to simplify certain aspects of the capital rules to meaningfully reduce the regulatory burden on community banking organizations. The Agencies expect that any changes in the capital rules would include changes in the six items listed above.
To avoid multiple changes in capital rules, the Agencies propose to extend the current treatment of the six capital items listed above. Therefore, until the new capital rules are issued or the Agencies otherwise determine, the non–advanced approaches banking organizations may continue to
- deduct from regulatory capital 80% of the amount of any of these items that is not includable in regulatory capital;
- apply a 100% risk weight to any amounts of MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted from capital;
- apply the current risk weights under the capital rules to amounts of nonsignificant investments in the capital of unconsolidated financial institutions and significant investments in the capital of unconsolidated financial institutions not in the form of common stock that are not deducted from capital; and
- include 20% of any common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital rule’s minority interest limitations in regulatory capital.
The Agencies are requesting comments on the Proposed Rule, and comments will be accepted for 30 days from the date of its publication in the Federal Register.
The Proposed Rule will benefit not only community banks, but all other US banking organizations other than those few banking organizations that are subject to the advanced approaches regulatory capital standards. The Proposed Rule, if adopted, also would allow the Agencies more time to develop revised capital rules as they would not have to act before the January 1, 2018 end of the phase-in period for the 2013 capital rule changes.