Federal Bank Regulators Seek Comment on Three Proposed Regulatory Capital Rules, Finalize Market Risk Rule

FDIC Dodd-Frank Federal Reserve OCC

On June 12, the Federal Reserve Board, the OCC, and the FDIC jointly issued three proposed rules, which would implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The first proposed rule would, among other things, (i) raise the minimum regulatory capital levels; (ii) introduce an additional common equity capital buffer; and (iii) adopt a stricter definition of capital. Taken together, these requirements would require banking organizations to increase the quality and quantity of their regulatory capital. The second proposed rule incorporates aspects of Basel II’s Standardized Approach to enhance the risk-sensitivity of a banking organization’s risk-weighted assets calculations. In addition, the second proposed rule sets forth alternatives that would replace the use of external credit ratings, a change required by Section 939A of the Dodd-Frank Act. The third proposed rule would apply to banking organizations that are currently subject to the advanced approaches rule or to the market risk rule, and for the first time, to savings and loan holding companies that meet the relevant size, foreign exposure, and trading activity thresholds. This rule seeks to enhance the risk-based capital rules’ sensitivity to trading risks and also would eliminate the use of external ratings as required by Section 939A of the Dodd-Frank Act. Comments on each of the proposed rules can be submitted through September 7, 2012.

Concurrent with the proposed rules, the federal regulators released a final rule regarding market risk. By amending the calculation of market risk, the final rule seeks to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions. The final rule incorporates comments received in response to a January 2011 proposed rule, as well as a December 2011 amended proposed rule, and applies to a banking organization with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more. According to the regulators, the most significant change from the proposals relates to the methods for determining the capital requirements for securitization positions. The final rule will impose greater capital requirements on the more subordinate tranches in a securitization because the final rule mechanism to calculate the capital charges on securitization exposures when the underlying pool of assets demonstrates credit weakness was altered to focus on delinquent exposures rather than on cumulative losses. This rule takes effect January 1, 2013.