The Federal Reserve Board said it has approved a final rule to help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.
The Fed said the final rule minimizes burden on smaller, less complex financial institutions and establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements, particularly for larger, internationally active banking organizations, that became apparent during the recent financial crisis. The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions.
On the quality of capital side, the final rule emphasizes common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments.
The Fed said that in total, for community banks, the changes from current regulations target a few areas that are higher risk, but are otherwise minimal. Nine out of ten financial institutions with less than $10 billion in assets would meet the common equity tier 1 minimum plus buffer of 7% in the final rule, according to data from March 2013.
As with all financial institutions subject to the final rule, community banks will have a significant transition period to meet the new requirements.
The Federal Reserve coordinated the final rule with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which continue to review this matter. The FDIC has provided notice that it will consider the matter as an interim final rule on July 9, 2013. The OCC expects to review and consider the matter as a final rule by July 9, 2013.
To read additional details of the Fed’s final rule click here.