Let’s Make the Regulatory Capital Rule Simple

By Lorenzo Prestigiacomo

On September 27, 2017, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the “Banking Agencies”) issued a proposed joint rule to simplify several requirements in the Banking Agencies’ regulatory capital rule for banks.

The proposed rule would apply only to banking organizations that are not subject to the advanced approaches in the capital rule, i.e. banks with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. However, some banking industry groups believe the proposed rules should apply to all banks.

Complex aspects of the existing capital rule to be simplified include:

  • Simplify the complex definition of high volatility commercial real estate (“HVCRE”) exposures in the Banking Agencies’ standardized approach capital framework with a more straightforward definition for higher-risk acquisition, development, or construction (“ADC”) loans called high volatility acquisition, development, or construction (“HVADC”). Under this proposal, certain new ADC exposures that would have been considered HVCRE may receive a lower risk weight of 130%, rather than 150%.
  • Simplify the threshold deduction treatment for mortgage servicing assets (“MSA”), deferred tax assets (“DTA”), and investments in the capital of unconsolidated financial institutions. This proposal increases the individual common equity tier 1 capital deduction threshold for MSA and DTA to 25% from 10%. It imposes a 25% limit common equity tier 1 capital on all investments in the capital of unconsolidated financial institutions.
  • Simplify the limitations on minority interest includable in regulatory capital. The proposal would eliminate the existing complex calculation to determine the amount of minority interest that could be included in the regulatory capital of a parent banking organization. Instead of basing the limitation on the minimum required capital of its subsidiaries, a parent banking organization would be allowed to include common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest up to 10 percent of the parent banking organization’s common equity tier 1, and total capital elements (before the inclusion of any minority interest and after certain deductions and adjustments), respectively.

    The proposed rule is consistent with the “Economic Growth and Regulatory Paperwork Reduction Act Report” issued by the Banking Agencies in March 2017. In that report, the Banking Agencies committed to meaningfully reducing regulatory burden, especially on community banking organizations, while at the same time maintaining safety, soundness, and the quality and quantity of regulatory capital in the banking system. Comments on this proposed rule are encouraged by the Banking Agencies and will be accepted for 60 days after publication in the Federal Register.