OCC Bulletin 2019-34| July 22, 2019

Simplifications to the Capital Rule: Final Rule

To

Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties

Summary

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) published a final rule in the Federal Register that simplifies certain aspects of the capital rule. The majority of the simplifications apply solely to banking organizations that are not subject to the advanced approaches capital rule (the advanced approaches capital rule generally applies to banks that are part of banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total consolidated foreign financial exposure).

Specifically, this rule (1) simplifies the current regulatory capital treatment for mortgage servicing assets (MSA), temporary difference deferred tax assets (DTA), and holdings of regulatory capital instruments issued by other financial institutions; and (2) simplifies the calculation for limitations on minority interest includable in regulatory capital. In addition, the final rule makes certain technical amendments to parts of the capital rule that apply to all banks.

In the October 2017 notice of proposed rulemaking that preceded this final rule, the agencies also proposed to substantially revise the treatment of high volatility commercial real estate (HVCRE) exposures. However, section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act superseded that portion of the proposal by requiring the agencies to revise the capital requirements for HVCRE exposures. Therefore, this final rule does not address the treatment of HVCRE exposures. The changes to the capital requirements for HVCRE exposures required by section 214 will be addressed in a separate rulemaking.

Note for Community Banks

The final rule applies to all national banks and federal savings associations (collectively, banks), including community banks.

Highlights

  • With regard to the treatment of MSAs, DTAs, and holdings of regulatory capital instruments issued by other financial institutions:
    • For non-advanced approaches banks, the rule replaces the existing individual 10 percent and cumulative 15 percent common equity tier 1 capital deduction thresholds for MSAs and temporary difference DTAs that cannot be realized through net operating loss carrybacks with individual thresholds of 25 percent of common equity tier 1. Non-advanced approaches banks will be required to deduct from common equity tier 1 capital any amount of these assets that individually exceeds the 25 percent threshold.
    • To reduce complexity for non-advanced approaches banks, the final rule replaces the current capital rule’s different deduction treatments for (i) significant investments in the regulatory capital of other financial institutions in the form of common stock, (ii) significant investments in the regulatory capital of other financial institutions that are not in the form of common stock, and (iii) non-significant investments in the regulatory capital of other financial institutions with one treatment for all investments in the regulatory capital of other financial institutions. Non-advanced approaches banks will be required to deduct from common equity tier 1 capital any amount of its total investments in the regulatory capital of other financial institutions that exceeds 25 percent of common equity tier 1 capital.
  • With regard to the inclusion of minority interest in regulatory capital:
    • For non-advanced approaches banks, the agencies have simplified the calculation for limiting minority interest in regulatory capital. Specifically, the final rule limits the inclusion of minority interest in regulatory capital as follows: of common equity tier 1 minority interest up to 10 percent of the bank’s common equity tier 1 capital; tier 1 minority interest up to 10 percent of the bank’s tier 1 capital; and total capital minority interest up to 10 percent of the bank’s total capital.
  • The final rule also makes several technical amendments to correct and clarify other areas of the capital rule that apply to all banks.

Background

In 2013, the agencies adopted a rule that strengthened the capital requirements applicable to banking organizations (capital rule). The capital rule increased the quantity and improved the quality of required regulatory capital, thereby strengthening the ability of banking organizations to absorb losses in times of market and economic stress.

Since issuance of the capital rule in 2013, banking organizations and other members of the public have raised concerns regarding regulatory burden, complexity, and costs associated with certain aspects of the rule. In response to these concerns, the agencies stated in the March 2017 Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Joint Report to Congress that they would work toward simplifying certain aspects of the capital rule for smaller and less complex banking organizations. Consistent with that commitment, the agencies are now finalizing a rule that simplifies compliance with several aspects of the capital rule for community banks.

Further Information

Please contact Mark Ginsberg, Senior Risk Expert, or David Elkes, Risk Expert, Capital Policy Division, at (202) 649-6370; or Carl Kaminski, Special Counsel, Chief Counsel’s Office, at (202) 649-5490.

 

Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel

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