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From Banking and Finance Law Daily, September 27, 2017

Agencies propose changes to simplify regulatory capital rule

By Colleen M. Svelnis, J.D.

The Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have proposed a rule that would simplify compliance requirements in the regulatory capital rule. This is intended to reduce regulatory burden in accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). The proposed rule simplifies the capital treatment for certain acquisition, development, and construction loans, mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest.

Comments on the joint proposal are due by 60 days after publication of the Notice of Proposed Rulemaking in the Federal Register.

The proposal would simplify and clarify a number of the more complex aspects of the existing capital rule. Most aspects of the proposed rule would apply only to banking organizations that are not subject to the "advanced approaches" in the capital rule, which are generally firms with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.

The proposal would apply a simpler regulatory capital treatment to:

  • Replace the complex definition of high volatility commercial real estate (HVCRE) exposures in the agencies’ standardized approach capital framework with a more straightforward definition for higher-risk acquisition, development, or construction (ADC) loans called high volatility acquisition, development, or construction (HVADC).
  • Simplify the threshold deduction treatment for mortgage servicing assets (MSAs), temporary difference deferred tax assets (DTAs) not realizable through carryback, and investments in the capital of unconsolidated financial institutions.
  • Simplify the limitations on minority interest includable in regulatory capital.

The proposed rule is consistent with a report issued by the agencies earlier this year following an EGRPRA review. In that report, the agencies committed to meaningfully reducing regulatory burden, especially on community banking organizations.

FDIC provides tools. "This notice of proposed rulemaking is intended to simplify and clarify a number of the more complex aspects of the agencies’ capital rules, including the definition of capital, the treatment of capital deductions, and the treatment of so-called High Volatility Commercial Real Estate, or HVCRE," stated Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, in a statement. Gruenberg noted that the HVCRE issue was single most commentedon provision of the agencies’ capital rules during the EGRPRA review process.

Gruenberg stated that the proposal seeks to balance reducing complexity while continuing to ensure appropriate capital requirements for banks’ construction lending activities.

The FDIC is providing tools for banks to help evaluate the impact the proposal will have. These include a summary of the proposal aimed at community banks, and an estimator tool that will allow an FDIC-supervised bank to evaluate the potential impact of the proposal on the institution. Additionally, Gruenberg announced plans for a national call with bankers to address any questions about the proposal.

FDIC Vice Chairman Thomas M. Hoenig advised the FDIC Board that, in his opinion, the proposed rule "is neither simpler nor less burdensome than the current rule. It is just different. Different, but it still remains overly complicated and burdensome offering mostly technical adjustments. It falls well short of achieving the kind of simplification that would provide truly meaningful benefit to the industry, investors, and the public."

Hoenig stated that he voted in favor of releasing the proposal because of the inclusion of additional questions so that the agencies can seek comment on meaningful alternative proposals. In particular, Hoenig stated that his voted relied upon the inclusion of Question 14, which asks for comment on whether the agencies "should consider a fundamental change to the manner in which banking organizations calculate and comply with minimum capital standards" and asks what the appropriate definition and level should be for the ratio? The question also asks "what relief should be realized upon implementation of this capital standard relative to changes in the call report and other reporting standards?"

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