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Federal Regulators Finalize Basel III Rules

Federal banking regulators recently finalized the Basel III capital rules. An avalanche of comment letters prompted the regulators to miss their year-end 2012 deadline and reconsider their original proposal. CBAI is pleased that the strong voices of community banks have been heard.

The Final Rule contains critically important concessions to community banks.

Accumulated Other Comprehensive Income (AOCI)
Regulators originally proposed including unrealized gains/losses on Available-for-Sale-Securities in capital. This proposal would have changed the investment behavior of community banks to the detriment of the housing recovery and municipal financing. Also, including unrealized gains/losses in capital would have injected significant volatility in community bank capital ratios.

The Final Rule permits a one-time permanent election (1st Quarter 2015 Call Report) for banks with less than $250 billion in assets to opt-out of including AOCI as part of regulatory capital.

Increased Risk Weights for Balloon Payment and Other Mortgage Loans
Regulators originally proposed significant increases in risk weights for residential mortgage loans, in some cases from 50% to potentially 150%. The proposal discounted the community bank business model of fair dealing and soundly underwriting residential mortgage loans. The proposal also ignored the importance of portfolio balloon mortgages particularly in rural communities and for nonconforming properties.

The Final Rule permits the use of current risk weights for residential mortgages when calculating risk-based capital.

Trust Preferred Securities (TruPS)
Regulators proposed phasing out of TruPS. Community banks earned an exemption for TruPS in the Collins Amendment to the Dodd Frank Act. The proposal was a clear violation of Congressional intent.

The Final Rule states that for bank holding companies that had total consolidated assets of less than $15 billion at December 31, 2009, TruPS are permanently grandfathered as a component of Additional Tier 1 Capital.

An additional victory is the delay in the implementation of the Basel III rules from January 1, 2014 to January 1, 2015.

CBAI sincerely thanks the many Illinois community bankers who submitted comment letters to the Federal Reserve’s Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. These victories would not have been possible without you.

Here are several links to resources which you may be interested in reviewing.

ICBA Summary
Final Rule
New Capital Rule Community Bank Guide
Expanded Community Bank Guide to the New Capital Rule for FDIC-Supervised Banks
Federal Reserve Guide for Community Banks
OCC Quick Reference Guide for Community Banks