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Basel III: A Judicial Medicine with Drastic Side Effects

The capital standards set forth by Basel III are scheduled to go into effect in 2015, and many community banks are concerned. The final rules on risk-based capital will affect a variety of financial institutions such as holding companies dealing in savings and loans. It also affects savings associations and other banking institutions, particularly bank holding companies with assets worth over $500 million.
 
Some changes to Basel III were made by the Federal Deposit Insurance Corporation, or FDIC, but the move came only after an outcry by representatives from various community banks. However, an official from the Independent Community Bankers of America, or ICBA, expressed skepticism that the concerns of community banks were being addressed by the regulators.
 
These specific concerns were outlined in a press release issued by the FDIC on July 9, 2013. It stated that there were numerous concerns regarding certain provisions within the Notice of Proposed Rulemaking, or NPR, which emanated from the community banks. An FDIC official was quoted as saying that “the interim final rule makes significant changes to aspects of the NPRs to address a number of these community bank comments.”
 
According to the Office of the Comptroller of the Currency, or the OCC, three major changes were proposed within the July 2013 document:

  • Residential mortgage exposures are to remain at the current levels. These exposures are the risk weights for most residential mortgages.
  • The community banks will be able to exclude their Accumulated Other Comprehensive Income, or AOCI, from the bank’s capital funds. Previous proposals would have forced banks to list their AOCI within the regulatory capital, but the new rule allows some organizations to pursue a single-use option. This option permits the selective filtration of some components of certain types of AOCI, and this behavior is similar to in-place rules regarding general risk-based capital. Institutions that elect for the AOCI opt-out must make the declaration on the first Call Report to be filed after January 1, 2015. The FR Y-9C or FR Y9SP should be used for this purpose.
  • On December 31, 2009, deposit institutions who meet two conditions will be able to continue reporting trust-preferred securities, or TruPs, under the category of Tier-1 capital. Qualifying institutions must have less than a total of $15 billion in consolidated assets, and they must have achieved a mutual form organization after the key date of May 19, 2010.

These victories are considered a vast improvement when compared to previous versions; however, small banks still feel the weight of an inordinate burden. For example, Basel III still imposes a 2.5 percent capital conservation buffer, which affects several common Tier-1 equities as well as the capital amounts above regulatory baselines. Penalties for failing to maintain the capital buffer could affect the bonus payments of some executives, and they could require the return of some capital as well.
 
Government assurances to community banks were predominant in the FDIC’s press release. According to the FDIC press release, “the FDIC is planning an extensive outreach program to assist our community banks in understanding the interim final rule and the changes it makes to the existing capital requirements.” The FDIC press release also mentioned that the government would provide various forms of technical assistance, training materials and outreach programs.
 
Should these assurances mitigate the concerns of community banks? Please comment below if you represent an affected institution. Give us your thoughts on the current state of Basel III and how it could impact your area.

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