By proposing to freeze the phase-in of Basel III capital rules, U.S. federal banking agencies appear to be taking the first step toward changing the regulatory approach to bank capital.
On Aug. 22, the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency jointly announced that they will be seeking comment on a proposal to simplify regulatory capital requirements by extending the existing capital treatment for some regulatory capital deductions and risk weights. The extension would not apply to banks subject to the advanced-approaches framework, which are typically institutions with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.
If implemented, the freeze would appease industry groups that have asked for changes to risk-based capital standards. The American Bankers Association wrote to the federal regulators in June specifically asking for a pause in phasing-in Basel III because of concerns over the international regulatory framework's treatment of mortgage servicing assets, or MSAs, and deferred tax assets, or DTAs. Under the revised capital rules, DTAs and MSAs would be subject to deduction from common equity Tier 1 capital if they surpass an individual limit of 10% of common equity Tier 1 capital.
The ABA pointed to the report completed earlier this year as part of the Economic Growth and Regulatory Paperwork Reduction Act, in which the regulators jointly admitted that some banking organizations saw the treatment of MSAs as unduly restrictive for community banks. The report also said the timing difference in the accounting of DTAs also presented community banks with some burden.
The U.S. Treasury Department's review of the financial regulatory framework also recommended revisiting the capital treatment of MSAs, adding that Basel III has imposed a "number of issues" at community banks.
Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America, said that he was "surprised" at the regulators' decision to act so soon, adding that he didn't expect efforts to simplify Basel III until next year. Cole said ICBA members see the move as a "positive development."
"For those banks that have been really hit hard by the punitive Basel III treatment of MSAs, this is really going to be very helpful," Cole said in an interview.
The banking agencies' intention to revisit the capital regime opens the door for suggestions on exactly how to change regulatory requirements.
FDIC Vice Chairman Thomas Hoenig said that the freeze is "important" but doesn't go far enough in providing the relief that community banks "so badly need." Hoenig said regulators should examine his recommendation for giving banks relief based on an institution's activities and amount of tangible equity, rather than asset size.
Cole said that the ICBA would like to see the regulators go back to the Basel I framework, and completely exempt community banks from Basel III. But Cole added that he sees a return to Basel I as unlikely, adding that it's more probable that the regulators simplify the Basel III rules to reduce burden on community banks.