U.S. banking regulators Tuesday published proposed new capital rules, and a final market risk rule, as they move to implement the new Basel III capital adequacy regime.
A trio of U.S. regulatory agencies (the Office of the Comptroller of the Currency, the board of governors of the Federal Reserve System, and the Federal Deposit Insurance Corp.) are seeking comment on three proposed new rules that would replace their current capital rules. The proposals would revise the risk-based and leverage capital requirements in line with the new standards agreed by global banking regulators, known as Basel III.
Among other things, the proposals would impose a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for certain banks, a leverage ratio that incorporates a broader set of exposures. They would also place limits on a bank’s capital distributions and certain discretionary bonus payments if it does not hold a specified “buffer” of common equity tier 1 capital in addition to the minimum risk-based capital requirements.
Additionally, the proposals: update the definition of tangible common equity, and the enforcement framework that constrains the activities of insured depository institutions based on their level of regulatory capital; revise the advanced approach risk-based capital rules consistent with Basel III; would revise and harmonize rules for calculating risk-weighted assets to enhance risk sensitivity and address other weaknesses that have revealed themselves in recent years; and, introduce new disclosure requirements for large banks.
The proposals were published in three separate notices, which the regulators say reflects the distinct objectives of each proposal, and allows potential commenters to better understand the various aspects of the overall capital framework, including which aspects of the rules would apply to which banking organizations.
Finally, the agencies also announced the finalization of a market risk capital rule that was proposed in 2011, which amends the calculation of market risk to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions.
The most significant change in the final version of this rule deals with the methods for determining the capital requirements for securitization positions, where the mechanism to calculate capital charges on securitizations when the underlying pool of assets demonstrates credit weakness was altered to focus on delinquent exposures rather than on cumulative losses. “This change has the effect of imposing greater capital requirements on the more subordinate tranches in a securitization,” the notice explains.
The final market risk capital rule is slated to take effect on January 1, 2013. Comments on the three notices are requested by September 7.