FDIC Considers Rules to Implement Basel III Standards
AT TODAY’S FDIC OPEN MEETING, the following final rule and notice of proposed rulemakings (NPRs) were considered and unanimously approved:
- Final rule regarding market risk amendment;
- NPR regarding Basel III general approaches rule;
- NPR regarding Basel III advanced approaches rule;
- NPR regarding standardized approaches rule.
In his opening remarks, Chairman Martin Gruenberg noted that “96 percent of all depository institutions currently hold sufficient to capital meet or exceed the new requirements” under the proposed rules. Gruenberg also said that the proposed rules include an addendum to “aid smaller banks in our identifying and understanding of how the proposals would apply to them” and said the FDIC would hold informational sessions and a national call-in on the rulemakings for these institutions.
Director Thomas Hoenig voiced his support for releasing the proposed rules for comment but raised concern that the minimum capital ratios “will not significantly enhance financial stability in the future.” He said the rules focus on risk-based capital which is “overly complex and opaque.” Hoenig noted that the tangible common equity ratio level is what “investors focus on” and what “ultimately determines whether capital is adequate.” He also raised concern with the proposed minimum leverage ratios, calling the requirements “too low to be of real value in moderating future crises.” For these reasons, Hoenig expressed his interest in hearing from the public on “whether consideration could be given to focusing less on risk-based capital and more on minimum leverage ratios, which are independent of models and less subject to manipulation.”
Final rule regarding market risk amendment
The final rule would incorporate Basel 2.5 into the agency’s rules. According to staff, the requirements are “substantially the same” as the requirements that were proposed in the interagency proposal that was released in January 2011. The final rule would require banks to assess capital on their correlation trading positions using a risk model that is “designed to capture all price risk at a 99.9% confidence interval over a one-year period.” The model would be subject to an initial surcharge set at 8 percent of the standardized measurement method. In addition, the rule would impose qualitative and quantitative disclosure requirements that are designed to “increase transparency and improve market discipline.” The rule takes effect on January 1, 2013.
Notice of proposed rulemaking regarding Basel III general approaches rule
This proposal would revise and replace certain provisions of the agency’s regulatory capital framework in a manner that is consistent with the capital provisions of Basel III. For all banks, the proposed rule would introduce a new common equity tier 1 risk-based capital ratio requirement of 4.5 percent as well as increase the minimum tier 1 risk-based capital ratio requirement from 4 percent to 6 percent. The minimum total risk-based capital ratio requirement would remain unchanged at 8 percent. In addition, banks would be required to hold an additional common equity capital buffer of 2.5 percent. Any bank that fails to maintain the buffer would be subject to restrictions on capital distributions and discretionary bonus payments. Under the rule, the well-capitalized threshold would be established at “50 basis points or one half percent lower than the minimum requirement for each ratio plus the capital conservation buffer.”
Banks that are subject to the advanced approaches rule would face additional requirements, including implementing the Basel III international leverage ratio in addition to the existing leverage ratio. Such banks would be required to maintain a countercyclical capital buffer comprised of common equity to “augment the capital conservation buffer during periods of excessive credit growth.” This buffer would initially be set at zero and would only be increased after public notice if the agencies determine an increase in capital is needed. In addition, if a foreign regulator were to increase the countercyclical buffer, applicable banks would also be required to increase their capital holdings on exposures to that foreign jurisdiction.
Deductions from regulatory capital related to mortgage servicing assets, deferred tax assets, and investments in the capital of unconsolidated financial institutions would be individually limited to 10 percent of common equity tier 1 capital, which would also be subject to an aggregate limitation of 15 percent of common equity tier 1 capital. The proposal includes an amendment made by staff to include the Basel III phase-in period of five years for this new risk rate treatment which was “inadvertently omitted” from the draft proposal.
The proposal will be open for a 90-day comment period following its publication in the Federal Register.
Notice of proposed rulemaking regarding Basel III advanced approaches rule
The proposal would revise the advanced approaches risk-based capital rule to incorporate aspects of Basel III as well as replace references to credit ratings with alternative standards of credit worthiness that is consistent with Section 939A of the Dodd-Frank Act. The proposal would enhance risk-based capital requirements for both on and off balance sheet counterparty credit risks, including risks associated with derivatives. Banks would be required to incorporate credit valuation adjustments, stress inputs, and “wrong way risk” into the capital requirements. For wholesale exposures to unregulated financial institutions, the proposal establishes a “multiplier of 1.25 to the correlation factor” for these exposures.
The new international leverage ratio would only apply to the advanced approaches banks (financial institutions with more than $250 billion in total consolidated assets or more than $10 billion in foreign exposures). These institutions would have to apply both the existing tier 1 risk-based capital ratio as well as the new international leverage ratio. The new international leverage ratio is designed to pull off balance sheet exposures into the ratio, including the standardized charge for a potential future exposure on derivatives as well as lending and funding commitments. The advanced approaches banks would be required to hold the 3 percent international leverage ratio requirement in addition to the existing requirements for the tier 1 leverage ratio.
The proposal will be open for a 90-day comment period following its publication in the Federal Register.
Notice of proposed rulemaking regarding standardized approaches rule
The proposal outlines changes to the general risk-based capital framework for purposes of determining risk-weighted asset. Under the proposed rules, an exposure to a non-U.S. sovereign entity would receive a risk rate based on the Organization for Economic Co-operation and Development (OECD) country risk classification. A risk rate of 150 percent would be assigned to a sovereign exposure if that sovereign has experienced a default event during the previous five years. In addition, exposures to foreign banks would be assigned a risk rate that is one category higher than the risk rate for exposures to the foreign bank’s home country. The proposal would assign a zero percent risk rate to direct, unconditional claims on the U.S. Government and a 20 percent risk rate to U.S. depository institutions. Risk rates on exposures to U.S. public sector entities, such as state and local governments, would remain unchanged.
With regard to mortgages, the proposal would assign risk rates ranging from 35 percent to 200 percent based on certain characteristics of the loan and the loan-to-value (LTV) ratio. The loan characteristics described in the proposed rule provide a basis for separating mortgage loans into two risk categories. Category one mortgages would generally include traditional fixed rate, first lien, and “prudently underwritten” mortgage loans. Category two mortgages would generally include junior liens and non-traditional mortgages, such as adjustable rate mortgages.
In addition, if a bank is unable to demonstrate to its federal supervisor that it has a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the bank would be required to assign the securitization exposure with a risk rate of 1,250 percent, which represents a deduction from capital. For securitization exposures that are guaranteed by the U.S. Government, or government sponsored enterprises, there is no change relative to the existing risk-based capital treatment.
The proposal will be open for a 90-day public comment period following its publication in the Federal Register and includes a proposed final effective date of January 1, 2015.
For a webcast of the meeting, please click here.
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AT TODAY’S FDIC OPEN MEETING, the following final rule and notice of proposed rulemakings (NPRs) were considered and unanimously approved:
- Final rule regarding market risk amendment;
- NPR regarding Basel III general approaches rule;
- NPR regarding Basel III advanced approaches rule;
- NPR regarding standardized approaches rule.
In his opening remarks, Chairman Martin Gruenberg noted that “96 percent of all depository institutions currently hold sufficient to capital meet or exceed the new requirements” under the proposed rules. Gruenberg also said that the proposed rules include an addendum to “aid smaller banks in our identifying and understanding of how the proposals would apply to them” and said the FDIC would hold informational sessions and a national call-in on the rulemakings for these institutions.
Director Thomas Hoenig voiced his support for releasing the proposed rules for comment but raised concern that the minimum capital ratios “will not significantly enhance financial stability in the future.” He said the rules focus on risk-based capital which is “overly complex and opaque.” Hoenig noted that the tangible common equity ratio level is what “investors focus on” and what “ultimately determines whether capital is adequate.” He also raised concern with the proposed minimum leverage ratios, calling the requirements “too low to be of real value in moderating future crises.” For these reasons, Hoenig expressed his interest in hearing from the public on “whether consideration could be given to focusing less on risk-based capital and more on minimum leverage ratios, which are independent of models and less subject to manipulation.”
Final rule regarding market risk amendment
The final rule would incorporate Basel 2.5 into the agency’s rules. According to staff, the requirements are “substantially the same” as the requirements that were proposed in the interagency proposal that was released in January 2011. The final rule would require banks to assess capital on their correlation trading positions using a risk model that is “designed to capture all price risk at a 99.9% confidence interval over a one-year period.” The model would be subject to an initial surcharge set at 8 percent of the standardized measurement method. In addition, the rule would impose qualitative and quantitative disclosure requirements that are designed to “increase transparency and improve market discipline.” The rule takes effect on January 1, 2013.
Notice of proposed rulemaking regarding Basel III general approaches rule
This proposal would revise and replace certain provisions of the agency’s regulatory capital framework in a manner that is consistent with the capital provisions of Basel III. For all banks, the proposed rule would introduce a new common equity tier 1 risk-based capital ratio requirement of 4.5 percent as well as increase the minimum tier 1 risk-based capital ratio requirement from 4 percent to 6 percent. The minimum total risk-based capital ratio requirement would remain unchanged at 8 percent. In addition, banks would be required to hold an additional common equity capital buffer of 2.5 percent. Any bank that fails to maintain the buffer would be subject to restrictions on capital distributions and discretionary bonus payments. Under the rule, the well-capitalized threshold would be established at “50 basis points or one half percent lower than the minimum requirement for each ratio plus the capital conservation buffer.”
Banks that are subject to the advanced approaches rule would face additional requirements, including implementing the Basel III international leverage ratio in addition to the existing leverage ratio. Such banks would be required to maintain a countercyclical capital buffer comprised of common equity to “augment the capital conservation buffer during periods of excessive credit growth.” This buffer would initially be set at zero and would only be increased after public notice if the agencies determine an increase in capital is needed. In addition, if a foreign regulator were to increase the countercyclical buffer, applicable banks would also be required to increase their capital holdings on exposures to that foreign jurisdiction.
Deductions from regulatory capital related to mortgage servicing assets, deferred tax assets, and investments in the capital of unconsolidated financial institutions would be individually limited to 10 percent of common equity tier 1 capital, which would also be subject to an aggregate limitation of 15 percent of common equity tier 1 capital. The proposal includes an amendment made by staff to include the Basel III phase-in period of five years for this new risk rate treatment which was “inadvertently omitted” from the draft proposal.
The proposal will be open for a 90-day comment period following its publication in the Federal Register.
Notice of proposed rulemaking regarding Basel III advanced approaches rule
The proposal would revise the advanced approaches risk-based capital rule to incorporate aspects of Basel III as well as replace references to credit ratings with alternative standards of credit worthiness that is consistent with Section 939A of the Dodd-Frank Act. The proposal would enhance risk-based capital requirements for both on and off balance sheet counterparty credit risks, including risks associated with derivatives. Banks would be required to incorporate credit valuation adjustments, stress inputs, and “wrong way risk” into the capital requirements. For wholesale exposures to unregulated financial institutions, the proposal establishes a “multiplier of 1.25 to the correlation factor” for these exposures.
The new international leverage ratio would only apply to the advanced approaches banks (financial institutions with more than $250 billion in total consolidated assets or more than $10 billion in foreign exposures). These institutions would have to apply both the existing tier 1 risk-based capital ratio as well as the new international leverage ratio. The new international leverage ratio is designed to pull off balance sheet exposures into the ratio, including the standardized charge for a potential future exposure on derivatives as well as lending and funding commitments. The advanced approaches banks would be required to hold the 3 percent international leverage ratio requirement in addition to the existing requirements for the tier 1 leverage ratio.
The proposal will be open for a 90-day comment period following its publication in the Federal Register.
Notice of proposed rulemaking regarding standardized approaches rule
The proposal outlines changes to the general risk-based capital framework for purposes of determining risk-weighted asset. Under the proposed rules, an exposure to a non-U.S. sovereign entity would receive a risk rate based on the Organization for Economic Co-operation and Development (OECD) country risk classification. A risk rate of 150 percent would be assigned to a sovereign exposure if that sovereign has experienced a default event during the previous five years. In addition, exposures to foreign banks would be assigned a risk rate that is one category higher than the risk rate for exposures to the foreign bank’s home country. The proposal would assign a zero percent risk rate to direct, unconditional claims on the U.S. Government and a 20 percent risk rate to U.S. depository institutions. Risk rates on exposures to U.S. public sector entities, such as state and local governments, would remain unchanged.
With regard to mortgages, the proposal would assign risk rates ranging from 35 percent to 200 percent based on certain characteristics of the loan and the loan-to-value (LTV) ratio. The loan characteristics described in the proposed rule provide a basis for separating mortgage loans into two risk categories. Category one mortgages would generally include traditional fixed rate, first lien, and “prudently underwritten” mortgage loans. Category two mortgages would generally include junior liens and non-traditional mortgages, such as adjustable rate mortgages.
In addition, if a bank is unable to demonstrate to its federal supervisor that it has a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the bank would be required to assign the securitization exposure with a risk rate of 1,250 percent, which represents a deduction from capital. For securitization exposures that are guaranteed by the U.S. Government, or government sponsored enterprises, there is no change relative to the existing risk-based capital treatment.
The proposal will be open for a 90-day public comment period following its publication in the Federal Register and includes a proposed final effective date of January 1, 2015.
For a webcast of the meeting, please click here.