They’re Here: The Final Interagency Regulatory Capital Rules

The Federal Reserve Board today approved the publication of the long-awaited final regulatory capital rules ("Final Rules" ), which were proposed one year ago (the "Proposed Rules").1 While today's action was taken by the Federal Reserve Board, the OCC and the FDIC are expected to announce their approval of the Final Rules by no later than July 9. Therefore, rather than just referring to the actions of the Federal Reserve Board in this discussion, we will refer hereinafter to the actions of all three federal banking agencies (the "Agencies").

As adopted, the Final Rules make major changes to the U.S. regulatory capital framework in a regulatory effort to strengthen the regulatory capital of U.S. banking organizations and bring the U.S. into compliance with the Basel Committee's current international regulatory capital accord ("Basel III"). The Final rules will replace the Agencies' general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules in accordance with the transition provisions described below.

Consistent with the Proposed Rules, the Final Rules broadly revise the basic definitions and elements of regulatory capital; make substantial changes to the credit risk weightings for banking and trading book assets through the adoption of material elements of the Basel II standardized approach for credit risk weightings; and finalize changes made to the Basel capital framework in the aftermath of the financial crisis to large U.S. banking organizations subject to the advanced Basel II capital framework. As stated by the Agencies, the new regulatory capital rules will establish the benchmark capital rules and capital floors that are generally applicable to U.S. banks under Section 171 of the Dodd-Frank Act (the "Collins Amendment").

The Final Rules also make changes to the Advanced Approaches framework that was proposed for the largest U.S. banks last year, and are broadly consistent with the Proposed Rules. Further, the Agencies are proposing changes to the "Market Risk" capital rule, that applies to banks with large trading exposures, to align the Market Risk rule with changes made at the international level by the Basel Committee.

The Final Rules will become effective on January 1, 2014, but with a mandatory compliance date of January 1, 2015 for banks other than those subject to the Advanced Approaches. On that date, most banking organizations would be required to begin the transition to the full implementation of the new capital framework by 2018. The effective date and compliance period, and the beginning of the transitional adjustments, would be January 1, 2014 for Advanced Approaches banking organizations.

Highlights of the Final Rules

As is well known, the Proposed Rules were controversial and raised a number of fundamental questions as to the scope of their applicability, the granularity of their requirements, and their possible impact on bank activities, operations and services. With the adoption of the Final Rules, many, but not all, of these questions are answered, and in general probably not to the banking industry's liking. In substance, with few exceptions, the Final Rules do not differ in material respects from the Proposed Rules.2 Accordingly, the Final Rules offer only modest accommodations to the concerns of community banks that the U.S. regulatory capital regime reflected in the Proposed Rules would be highly burdensome for smaller banks and that the broad application of the Basel regulatory framework to community banks was unnecessary.

Applicability; Scope and Exclusions. Like the Proposed Rules, the Final Rules generally apply to all U.S. banks that are subject to minimum capital requirements, including Federal and state savings banks, as well as to bank and savings and loan holding companies other than "small bank holding companies" (generally bank holding companies with consolidated assets of less than $500 million). In this regard, the Agencies were effectively unmoved by the petitions of the banking industry to scale back the scope of the Final Rules, particularly with respect to the elements, minimum requirements and calculations of regulatory capital. In this regard, the Agencies were influenced by recent studies and analyses showing that the banking industry generally would have little difficulty in complying with the new minimum capital requirements.

In response to insurance and nonfinancial industry concerns about the applicability of " bank-centric" regulatory capital rules to insurance and grandfathered nonfinancial...