Late last fall, the Federal Reserve System board of directors announced that it would rewrite its proposal on setting new bank capital requirements. This announcement came in response to thousands of comment letters that bankers had filed with the Federal Reserve System board. Banker effort was buoyed by letters from various state congressional delegations, including Indiana’s, urging the Fed to consider the ability of community banks to meet the rigid requirements supported by the proposal, largely based on Basel III guidelines.
Last week the Federal Reserve put forth a second attempt at setting new rules for capital held by banks. The new proposal is 972 pages long and, for the largest banks in the country, does little to change the original proposal. However it does include significant changes for community banks.
As background, the comment letter that the Indiana Bankers Association sent called upon an outright exemption for any bank that is not actively involved in international banking transactions. Though last week’s “final draft” falls short of adopting our suggestion, it does provide much-needed changes on behalf of community banks. As the Independent Community Bankers of America, the American Bankers Association and countless Washington, DC, bank attorneys continue to digest and analyze the draft, a few provisions stand out:
- All banks will be allowed to continue to use the Basel I risk weightings for residential mortgage loans. This eliminates the Basel III requirement for loan-to-value ratios to calculate risk weights for residential mortgages.
- Banks with less than $250 billion in assets will have the option to exclude accumulated other comprehensive income as regulatory capital, thus assuring less volatility in regulatory capital ratios.
- The draft returns to the Dodd-Frank Act standard for trust-preferred securities to be used by banks under $15 billion in assets. This is an important issue for many community banks, as sources of capital for them are extremely limited.
While several capital concerns remain — such as including a capital conservation buffer and further restrictions on mortgage servicing rights — it is good news that the Federal Reserve did pay attention to all of those letters and meetings to discuss the original proposal. I am sure that there is much more to come on this proposal; I also am sure that it is not really the “final draft.”