The Federal Reserve Board this morning approved a final capital rule that aims to minimize the burden on smaller and less complex financial institutions, like community banks.
Under the final rule, which implements Basel III capital reforms, as well as some changes required by Dodd-Frank, minimum requirements will increase for both the quantity and quality of capital that banks hold. The rule stipulates a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions.
The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.
On the quality of capital side, the rule emphasizes common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity.
Where community banks are concerned, the changes from current regulations target a few higher-risk areas, but are otherwise minimal. According to a statement from the Fed, nine out of 10 financial institutions with less than $10 billion in assets would meet the common equity tier 1 minimum plus buffer of 7 percent in the final rule.
The phase-in period for smaller and less complex banks will begin in January 2015, while the phase-in period for larger institutions will begin in January 2014. Savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the final rule at this time.
The FDIC and OCC will consider this as a final rule on July 9.
