Fed Approves Final Rule on Capital Requirements
| Date Published | 7/3/2013 |
| Author | The Federal Reserve |
| Theme | Housing Finance Policy |
| Country | United States |
Fed Approves Final Rule on Capital
Requirements
July 2, 2013
Press Release
The Federal Reserve Board on Tuesday approved a final rule to help ensure
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.
The final rule minimizes burden on smaller, less complex financial
institutions; It establishes an integrated regulatory capital framework that
addresses shortcomings in capital requirements, particularly for larger,
internationally active banking organizations, that became apparent during the
recent financial crisis. The rule will implement in the United States 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.
"This framework requires banking organizations to hold more and higher
quality capital, which acts as a financial cushion to absorb losses, while
reducing the incentive for firms to take excessive risks," Chairman Ben
Bernanke said. "With these revisions to our capital rules, banking
organizations will be better able to withstand periods of financial stress,
thus contributing to the overall health of the U.S. economy."
Under the final rule, minimum requirements will increase for both the
quantity and quality of capital held by banking organizations. Consistent with
the international Basel framework, the 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.
The rule 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.
On the quality of capital side, 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. The final rule also
improves the methodology for calculating risk-weighted assets to enhance risk
sensitivity. Banks and regulators use risk weighting to assign different levels
of risk to different classes of assets--riskier assets require higher capital
cushions and less risky assets require smaller capital cushions.
"Adoption of the capital rules today is a milestone in our post-crisis
efforts to make the financial system safer," Governor Daniel Tarullo said.
"Along with the stress testing and capital review measures we have already
implemented, and the additional rules for large institutions that are on the
way, these new rules are an essential component of a set of mutually
reinforcing capital requirements."
The banking agencies carefully reviewed the comments received on the
proposal and made a number of changes in the final rule, in particular to
address concerns about regulatory burden on community banks. For example,
the final rule is significantly different from the proposal in terms of risk
weighting for residential mortgages and the regulatory capital treatment of
certain unrealized gains and losses and trust preferred securities for
community banking organizations.
In total, for community banks, the changes from current regulations target a
few areas that are higher risk, but are otherwise minimal. Indeed, 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.
As with all financial institutions subject to the final rule, community
banks will have a significant transition period to meet the new requirements.
The phase-in period for smaller, less complex banking organizations will not
begin until January 2015 while the phase-in period for larger institutions
begins in January 2014. In another change from the proposal, savings and loan
holding companies with significant commercial or insurance underwriting
activities will not be subject to the final rule at this time. The Federal
Reserve will take additional time to evaluate the appropriate regulatory
capital framework for these entities.
The Federal Reserve 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.
http://www.federalreserve.gov/bcreg20130702a.pdf
http://www.federalreserve.gov/commbankguide20130702.pdf