Enter to open, tab to navigate, enter to select
US Basel III Rules Finalized
Practical Law Legal Update 8-533-0987 (Approx. 4 pages)
US Basel III Rules Finalized
| Published on 02 Jul 2013 • USA (National/Federal) |
On July 2, 2013, the Federal Reserve Board issued a final rule implementing new capital and related requirements for banks under Basel III, and the Dodd-Frank Act.
On July 2, 2013, the Federal Reserve Board (FRB) published a final rule implementing the enhanced capital and related requirements under Basel III, and the Dodd-Frank Act.
The final rule largely adheres to the proposed rules issued in June 2012, including the proposed minimum regulatory capital requirements. Once fully implemented, all covered banking organizations will be subject to a:
- New common equity tier 1 capital ratio of 4.5%.
- Tier 1 capital ratio of 6% (increased from the current 4% requirement).
- Total capital ratio of 8% of risk-weighted assets (unchanged from the current requirement).
- Leverage ratio of 4%.
Large, internationally-active banks that are subject to (or have elected to use) the FRB's advanced approaches rule (advanced approaches institutions) will also be subject to a minimum supplementary leverage ratio of 3%.
The final rule also maintains the proposed rule's capital conservation buffer, which requires all covered banking organizations to hold additional tier 1 capital above their minimum requirements in an amount greater than 2.5% of their total risk-weighted assets. Banks that do not meet this requirement will be subject to restrictions on capital distributions and discretionary bonus payments to executive officers. Advanced approaches institutions will also be subject to a countercyclical capital buffer of up to 2.5% of total risk-weighted assets.
However, in response to the more than 2,600 comment letters submitted by industry participants, the final rule includes certain key changes. Major changes to the proposed rules include:
- Risk weights for residential mortgages. The proposed rules assigned residential mortgage exposures new risk rates ranging from 35 to 200%, based on the mortgage's loan-to-value ratio and certain other features. Responding to industry concerns that this would significantly impair banks' traditional mortgage lending business, the final rule does not implement the proposed changes and instead maintains the current risk weights of:
- 50% for most first-lien exposures; and
- 100% for other residential mortgage exposures.
- Accounting for unrealized gains and losses on available-for-sale securities. The proposed rules would have required that unrealized gains and losses in a bank's available-for-sale securities be included in its common equity tier 1 capital calculation. Recognizing that this requirement would introduce regulatory capital volatility as a result of fluctuations in benchmark interest rates, the final rule allows banks other than advanced approaches institutions to opt out of this requirement. In order to prevent regulatory arbitrage, the rule requires that this be a one-time election, made on the first regulatory reporting period under the final rule.
- Phase-out of trust preferred securities for smaller bank and thrift holding companies. Recognizing that community banking organizations have more limited access to capital markets, the final rule does not require a phase-out of non-qualifying tier 1 capital instruments (such as trust preferred securities) issued prior to May 19, 2010. This exemption applies to banking organizations that:
- had less than $15 billion in assets as of December 31, 2009; or
- were organized in mutual form as of May 19, 2010.
- Compliance date requirements. The final rule requires compliance with the new capital framework to begin:
- on January 1, 2014 for advanced approaches institutions; and
- on January 1, 2015 for all other banking organizations subject to the requirements.
However, full compliance with all of the final rule's requirements will be phased in over a multi-year schedule, as set forth under the rule. - Exemption for insurance-focused thrift holding companies. The final rule maintains an exemption from the rule's requirements for small bank holding companies subject to the FRB's Small Bank Holding Company Policy Statement (12 C.F.R. Pt. 225, App. C), and further extends the exemption to thrift holding companies that:
- have more than 25% of their consolidated assets derived from insurance underwriting activities (other than credit insurance); or
- are grandfathered unitary thrift holding companies and 50% or more of their total consolidated assets or revenues are derived from nonfinancial activities.
Industry response to the changes incorporated in the final rule have been largely favorable. However, the American Bankers Association has issued a statement in support of legislation introduced in the US House and Senate that would require a comprehensive economic analysis of the rule's impact before it goes into effect.
The FRB also published a proposed rulemaking that would make conforming changes to the FRB's current market risk capital rule. For background on the market risk capital rule, see Article, Final Market Risk Capital Rule.
The OCC and the FDIC are expected to approve the final rule in their meetings scheduled for July 9.
Practical Law will, together with Debevoise & Plimpton LLP, conduct a webinar on the Basel III final rules. Register for the webinar here.
The final version of the main legislation implementing Basel III in the EU was also published on June 27, 2013 (see Legal Update, CRD IV legislation published in Official Journal).
For background on the Basel III and Dodd-Frank capital requirements and the 2012 proposed rules, see:
- Article, Basel III and the New US Capital Framework Proposals (discussing the June 2012 proposed rules).