Federal Regulators Proposed Simplified Capital Requirements

September 28 –  Federal banking regulators have proposed simplified capital rules that would apply to mid-size and small community banks. 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.

Specifically, 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.

The proposed rule is consistent with the Economic Growth and Regulatory Paperwork Reduction Act report issued by the agencies earlier this year. In that report, the agencies committed to meaningfully reducing regulatory burden, especially on community banking organizations, while at the same time maintaining safety and soundness and the quality and quantity of regulatory capital in the banking system.

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, according to FDIC Chairman Martin Gruenberg.

In a statement following the agencies’ announcement, Gruenberg said, “The HVCRE issue was the single most commented-on provision of the agencies’ capital rules during the EGRPRA process. “This proposal aims to strike a balance between reducing complexity on the one hand,” he said, “and continuing to ensure appropriate capital requirements for banks’ construction lending activities on the other.”

To facilitate comment on the NPR, particularly by community banks, the agencies are also providing a number of tools to accompany the notice itself, including a summary of the NPR targeted to community banks and an estimator tool that will allow an FDIC-supervised bank to evaluate the potential impact of the proposal on the institution. A national call with bankers is being planned to address their questions once the industry has had an opportunity to review the proposal.

“Going forward, I think it is also appropriate for the banking agencies to consider more comprehensive approaches to simplify the existing regulatory capital rules for community banks,” Gruenberg’s statement concluded. “In that regard, I encourage commenters to respond to questions in the NPR on more comprehensive approaches to the simplification of the capital rules as they apply to community banks.

Comments on this proposal will be accepted for 60 days after publication in the Federal Register.

Support for the NPR was expressed by the Independent Community Bankers of America and the American Bankers Association, but the two big trade groups also raised concerns about certain aspects of the proposal.

“Provisions in the plan to simplify standards for mortgage-servicing rights and other high-quality assets would reduce the unnecessary burden on community banks and acknowledge their strong balance sheets and capital positions,” said ICBA President and CEO Camden R. Fine. “However, the plan’s punitive treatment of acquisition, development and construction lending could curtail growth in many local communities.”

ABA’s President and CEO Rob Nichols called reviewing and refining the capital rules for community banks “a step in the right direction.” He added, however, “The proposed provisions affecting commercial real estate will require careful evaluation to ensure they achieve the goal of encouraging business lending — especially to small businesses.”

Also expressing skepticism was FDIC Vice Chairman Thomas M. Hoenig. In a statement to the agency’s board, he began by noting that the NPR is intended to simplify capital requirements and reduce regulatory burden for banks following comments received during the EGRPRA process.

“Its preamble suggests it is designed to simplify the regulatory treatment for certain assets,” he said “However, in reviewing this NPR, I find that it 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. Unfortunately, the proposed changes will only perpetuate the disparate capital benefits across banks of different sizes and provide only minimal regulatory reporting relief.”

Nevertheless, Hoenig said he would vote to release the NPR, noting that the agencies seek comment on additional alternatives to simplify and streamline the regulatory capital rules.

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