July 9, 2013
OCC Approves Final Rule on Regulatory Capital; Proposes Doubling Leverage Ratio for the Largest Banks
WASHINGTON - The Office of the Comptroller of the Currency (OCC) approved a final rule revising regulatory capital rules applicable to national banks and federal savings associations on July 9, 2013, and, with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (FRB), proposed doubling the leverage ratio for large interconnected U.S. banking organizations.
“With the new capital rule, the federal banking agencies are taking an important step to strengthen the banking system and protect it from future financial crises,” said Comptroller of the Currency Thomas J. Curry. “I’m pleased that the new capital rule not only improves the quantity and quality of capital, but does so in a way that minimizes the burden on community banks and federal savings associations.”
In the separate rulemaking on leverage ratio standards for large, interconnected U.S. banking organizations, the OCC, the FDIC, and the FRB propose to add a 6 percent supplementary leverage ratio requirement to the “well-capitalized” capital category to their respective prompt corrective action regulations for any covered insured depository institution. In addition, under the proposal, a covered bank holding company would be subject to a supplementary leverage ratio buffer of 2 percent, above the 3 percent minimum requirement for banking organizations using the advanced approaches under the new capital rule. Failure to maintain this buffer would result in limitations on distributions and discretionary bonus payments.
The proposal, if adopted, would take effect on January 1, 2018, concurrent with the 3 percent minimum supplementary leverage ratio requirement in the new capital rule. The OCC will accept comments on the notice of proposed rulemaking for 60 days following its publication in the Federal Register.
The new final capital rule contains three key changes from the June 12, 2012 proposal to help reduce the burden on smaller banking organizations while still promoting a better capitalized U.S. banking system.
First, the new capital rule does not change the current treatment of residential mortgage exposures. This was an important issue for many community banking organizations seeking to continue to meet the credit needs of their customers.
Second, banking organizations that are not subject to the advanced approaches capital rules can opt not to incorporate most amounts reported as Accumulated Other Comprehensive Income (AOCI) in the calculation of their regulatory capital. This option is consistent with the treatment of AOCI under the current rules, and should help smaller banking organizations avoid volatility in their regulatory capital requirements.
Finally, smaller depository institution holding companies—those with assets less than $15 billion—and certain mutual holding companies (regardless of asset size) will be allowed to continue to count as Tier 1 capital most existing Trust Preferred Securities that were issued prior to May 19, 2010 rather than phasing such securities out of regulatory capital. This treatment will provide greater consistency with related provisions of the Dodd-Frank Act that limit inclusion of such securities in regulatory capital.
To aid smaller, less complex institutions understand and implement the final rule, the OCC is publishing a quick reference pamphlet and a short guide for national banks and federal savings associations. The guides are available at the links below.
Most banking organizations are required to apply the new capital rules on January 1, 2015. However, the largest internationally active banking organizations, which are subject to the advanced approaches provisions of the new capital rule, are required to apply the provisions on January 1, 2014.
The new capital rule also introduces several new standards and requirements that were included in the proposed rule. The rule sets a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. It also places limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. The rule revises the prompt corrective action framework to incorporate the new regulatory capital minimums. It also enhances risk sensitivity and addresses weaknesses identified over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with section 939A of the Dodd-Frank Act.
Under the new capital rule, banking organizations with more than $50 billion in assets have enhanced disclosure requirements related to regulatory capital adequacy and risk management. Banking organizations subject to the advanced approaches capital rules also must meet a supplementary leverage ratio requirement that incorporates a broader set of exposures, a countercyclical capital buffer, and additional capital charges and standards for derivatives exposures.
The new capital rule and the joint notice of proposed rulemaking on the supplemental leverage ratio standards will be published soon in the Federal Register.