Federal Banking Agencies Issue Final Ruling on the Extension of Certain Capital Rule Transitions

By Baker Newman Noyes December 4, 2017

In response to concerns raised by bankers and other members of the public about regulatory burden and complexity, particularly for community banks, the Office of the Comptroller of the Currency, Federal Reserve and the Federal Deposit Insurance Corporation (collectively, the Agencies) jointly published a final rule on November 21, 2017. The rule extends the regulatory capital treatment applicable during 2017 under the regulatory capital rules for certain items for banking organizations that are not subject to the agencies’ advanced approaches capital rules, which are generally those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.  This rule is effective January 1, 2018.

For non-advanced approaches banking organizations, the final rule extends the current regulatory capital treatment for the following items:

1. Mortgage servicing assets (MSAs),
2. Deferred tax assets (DTAs) arising from temporary differences that could not be realized through net operating loss carrybacks,
3. Significant investments in the capital of unconsolidated financial institutions in the form of common stock,
4. Non-significant investments in the capital of unconsolidated financial institutions,
5. Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock,
6. Common equity tier 1 minority interest,
7. Tier 1 minority interest, and
8. Total capital minority interest exceeding the capital rules’ minority interest limitations.

The final rule also continues the provision to deduct from regulatory capital 80% of the amount of items 1 through 5.

The final rule also allows smaller banks to continue using a 100% risk weight for MSAs, DTAs, and significant investments in the capital of unconsolidated financial institutions, rather than the 250% risk weight for these items which was scheduled to take effect beginning January 1, 2018. As a result, the final ruling could have a positive impact on capital ratios during 2018 and thereafter.

Under the final rule, advanced approaches banks are still subject to the transition provisions established by the capital rules for the items above and are required to apply the capital rules’ fully phased-in treatment for them beginning January 1, 2018.

You can find a copy of the final ruling issued by the agencies by clicking here. To discuss how this ruling might affect your financial institution, please contact your BNN advisor at 1.800.244.7444.