Prudential Regulators Finalize Regulatory Capital Rule, Propose New Leverage Ratio for Large Banks

FDIC Federal Reserve OCC Capital Requirements Basel

On July 9, the FDIC and the OCC approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The same rule was approved on July 2 by the Federal Reserve Board. The final rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1 capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. The rule also establishes a minimum leverage ratio of 4% for all banking organizations. In response to concerns raised by smaller and community banking organizations, the regulators did not finalize more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages, as explained in more detail in our recent post. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations, but does extend the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements. Also on July 9, the FDIC and the OCC approved a proposed rule that would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due 60 days after it is published in the Federal Register.