Agencies Issue Regulatory Capital Simplification Proposal

September 28, 2017

The federal banking agencies yesterday issued a proposed rule that would simplify the complex Basel III regulatory capital calculations for all but the very largest banks. The proposal would simplify the treatment of assets subject to common equity tier 1 capital threshold deductions and limitations on minority interest and replace the definition of high-volatility commercial real estate exposures with a more straightforward measure.

ABA President and CEO Rob Nichols described the proposal as a “step in the right direction that acknowledges what our members already know.” While aspects of the proposal are limited to banks not using the Basel advanced approaches, ABA will continue advocating for these and other simplification efforts to apply to all banks. “We look forward to working with the regulators on this proposal and other sensible reforms, including recommendations from [the Treasury Department’s] June report that would allow banks to continue playing their important role in accelerating economic growth.”

Consistent with ABA’s advocacy, the proposal would loosen the treatment of CET1 capital threshold deductions for mortgage servicing assets; temporary difference deferred tax assets not eligible for carryback; and investments in the capital of unconsolidated financial institutions. It would replace a combined deduction limit of 15 percent of CET1 for MSAs and DTAs with a 25 percent limit that applies to each category of asset. Capital investments in unconsolidated financial institutions would also receive a 25 percent deduction limit, regardless of the significance of the investment.

The proposed rule would replace the complex definition of HVCRE exposures -- which has caused numerous headaches for bankers in recent years -- with a definition for high-volatility acquisition, development or construction loans, or HVADC, that would apply to credit facilities that primarily finance or refinance ADC activities and that would receive a 130 percent risk weight, unlike the 150 percent risk weight for HVCRE. “The proposed provisions affecting commercial real estate will require careful evaluation to ensure they achieve the goal of encouraging business lending -- especially to small businesses,” Nichols said.

Finally, the proposal would eliminate the current complex calculation for minority interest that can be included in regulatory capital. Includable minority interest would be able to account for up to 10 percent of the parent banking organization’s CET1, tier 1 and total capital elements. The FDIC also issued a community bank summary and an Excel-based tool that banks can use to estimate how their regulatory capital would change under the proposal. Comments on the proposal are due 60 days after it is published in the Federal Register.

Read the proposed rule.
Read the agencies' summary for community banks.
Download the Excel estimator tool.
Read ABA's most recent comment letter on this topic.
For more information, or to join ABA's working group on this proposal, contact ABA's Hugh Carney.