Fed Approves of Final Rule for Basel III Implementation

The ""Federal Reserve Board"":http://www.federalreserve.gov/default.htm announced its approval of a final rule to implement the Basel III regulatory capital reforms and other changes required by the Dodd-Frank Act.

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The Basel III reforms were created to address ""shortcomings in capital requirements, particularly for larger, internationally active banking organizations, that became apparent during the recent financial crisis.""

""This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks,"" said Fed chairman Ben Bernanke. ""With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.""

Consistent with the international Basel III framework, the approved rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent as well as a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets.

The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and [COLUMN_BREAK]

includes a minimum leverage ratio of 4 percent for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.

In terms of quality of capital, the final rule emphasizes common equity tier 1 capital--""the most loss-absorbing form of capital""--and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity.

The Fed also announced a number of changes in the rule designed to address concerns about the regulatory burden on smaller community banks. According to a release, data from March 2013 shows nine out of 10 financial institutions with less than $10 billion in assets would meet the common equity tier 1 minimum plus buffer of 7 percent, making the impact from the finalized rule minimal.

In the area of residential loans, the rule will continue to apply existing risk-based capital standards, including a 50 percent risk weight for safely underwritten first-lien mortgages that are not past due.

Community banks will also have a longer transition period to meet the new requirements. According to the Fed, the phase-in for smaller banking organizations will not begin until January 2015, while the phase-in period for larger banks starts in January 2014.

""I'm pleased that we were able to agree on a rulemaking that not only improves the quantity and quality of capital for banks of all sizes, but does so in a way that minimizes the burden on community banks,"" said ""Comptroller of the Currency"":http://occ.treas.gov/index.html Thomas Curry, who added he intends to sign the final rule by mid-July. ""I think those are important accommodations, and it is entirely appropriate that they apply to the community banks and thrifts that had nothing to do with bringing on the crisis.""