Basel III Capital Rule – Impact and Reporting Nancy Fitzgerald Lead Risk Specialist

Basel III Capital Rule –
Impact and Reporting
Nancy Fitzgerald
Lead Risk Specialist
Federal Reserve Bank of Kansas City
Disclaimer
The opinions expressed are those of the presenter
and are not those of the Federal Reserve Bank of
Kansas City, the Federal Reserve System, or its
Board of Governors.
Applicability of New Capital Rules
• Banking organizations that include:
 National banks
 State member and nonmember banks
 Savings associations
• Holding companies include:
 Top-tier bank holding companies (BHCs) with consolidated
assets greater than $500 million
 Top-tier savings and loan holding companies (SLHCs)
• New Basel III rules do not currently apply to SLHCs
substantially engaged in insurance underwriting or
commercial activities
Important Dates
January 1, 2015: Effective date of the new rule for community
banking organizations
Form & Regulatory
Capital Schedule
First Reporting
Date
Filers
FFIEC Call Report/RC-R
March 31, 2015
Banks, Savings Associations
FR Y-9C/HC-R
March 31, 2015
Top-tier BHCs & SLHCs $500 million
in consolidated assets, exception for
insurance SLHCs
FR Y-9SP/SC-R
June 30, 2015
Top-tier SLHCs less than $500 million
in consolidated asset, exception for
insurance SLHCs
Regulatory Capital Schedules
• FFIEC RC-R & FR Y-9C HC-R Part 1.B:
 The components of capital, adjustments and deductions
 Recently approved and implemented for the largest banks in 2014
 Will replace the existing Part 1.A. in 2015
• FR Y-9SP SC-R Part 1:
 Recently approved
 Will be implemented in 2015
• FFIEC RC-R & FR Y-9C HC-R & FR Y-9SP SC-R Part II:
 Risk-weighted assets
 June 27th FFIEC teleconference on proposed reporting changes
 HC-R & SC-R comment period closed October 6th
 Will be implemented in 2015
AOCI Opt-Out Election
• Regulatory capital schedule for first reporting date
contains the accumulated other comprehensive income
(AOCI) opt-out election
• Opt-Out means most components of AOCI will not affect
regulatory capital
• Enter “1” for yes to opt-out; enter “0” for no
• Largest banks must enter “0” for no
• Transition provisions for institutions that do not opt-out
AOCI Opt-Out Election (Cont’d)
• Components of AOCI that will not affect regulatory
capital if you opt-out, but must be reported (items 9.a
through 9.e) in the regulatory capital schedule:
a. Unrealized gains/losses on available-for-sale (AFS)
securities
b.Unrealized losses on AFS preferred stock
c. Accumulated net gains/losses on cash flow hedges
d.Gains/losses attributed to postretirement plans
e. Unrealized gains/losses on held-to-maturity securities
Changes to Capital: The Numerator
• Common equity tier 1 capital (CET1):
New sub-component of tier 1 regulatory capital
Adjustments & deductions are made to CET1
New risk-based ratio incorporates CET1
CET1 must be the predominant form of total capital
Changes to Capital:
The Numerator (Cont’d)
• Deferred Tax Assets (DTAs) Current Rules:
Tier 1 limit on DTAs dependent on future taxable income
The lesser of:
i. The amount of DTAs the bank expects to realize in one year
ii.10 percent of the bank’s tier 1 capital
Amounts over this limit are deducted from tier 1 capital
Changes to Capital:
The Numerator (Cont’d)
• DTAs New Rules – Threshold Deductions
• Deduct from CET1:
DTAs that arise from net operating losses (NOLs) and tax
credit carryforwards
DTAs that arise from temporary differences that cannot be
realized through NOL carrybacks and that exceed 10
percent of CET1
• Starting in 2018 the amount of such DTAs not deducted
from CET1 has a risk weight of 250 percent
Changes to Capital:
The Numerator (Cont’d)
• Mortgage Servicing Assets (MSAs) Current Rules:
MSAs cannot exceed 100 percent of tier 1 capital
Fair value limitation: the lesser of 90 percent of fair value
and 100 percent of book value may be included in capital
Disallowed amount is deducted from tier 1
Changes to Capital:
The Numerator (Cont’d)
• MSAs New Rules – Threshold Deductions
• Deduct from CET1:
MSAs that exceed 10 percent of CET1
• Starting in 2018 the amount of MSAs not deducted from
CET1 has a risk weight of 250 percent
Changes to Capital:
The Numerator – Threshold Deductions
MSAs
< 10%
CET1
DTAs <
10%
CET1
Other <
10%
CET1
Sum of MSAs + DTAs +
Significant investments in
common stock of unconsolidated
financial institutions cannot
exceed 15 percent of CET1 after
other deductions
Summary of CET1 Calculation
+
±
-
-
=
Common Stock
Retained Earnings
AOCI
Deductions
Goodwill
DTAs (NOL)
Other Intangibles
Threshold Deductions
MSAs > 10% CET1
DTAs > 10% CET1
Third Threshold item > 10% CET1
Aggregate Threshold Deductions > 15% CET1
Common Equity Tier 1
Changes to Risk-Weighted Assets:
The Denominator
• Securitizations New Rules
• How is the risk-weighting of securitizations changing?
• What is a securitization?
Tranching of credit risk
On- and off-balance sheet exposures
Underlying exposures are financial
Includes the FHLB Mortgage Partnership – see preamble
Changes to Risk-Weighted Assets:
The Denominator (Cont’d)
• Securitizations:
§217.41(c) Due diligence requirements:
‒ Must demonstrate understanding of the exposure to the
regulator’s satisfaction
‒ Pre-purchase analysis within three days:
 Securitizations structure, e.g., cash flow waterfall, triggers and
servicer performance
 Data on underlying assets, e.g., past due and default rates, borrower
characteristics, loan attributes, pool diversification
 Market data that affects the value of the securitization
‒ On-going analysis at least quarterly
‒ Otherwise regulator can require risk weight of 1,250 percent
Changes to Risk-Weighted Assets:
The Denominator (Cont’d)
• Securitizations
• Three Risk Weight Approaches:
1. Gross-up approach
2. Simplified Supervisory Formula Approach (SSFA)
3. 1,250 percent
• Minimum risk weight for gross-up and SSFA is 20 percent
• Must use the same approach for all securitizations
Capital Ratios
Ratios
(Column A)
2013
Current
Rules
Minimum
Requirements
=
PCA
Adequately
Capitalized
(Column B)
2013
Current
Rules
PCA
Well
Capitalized
(Column C)
2015
New Rules
Minimum
Requirements
=
PCA
Adequately
Capitalized
(Column D)
2015
New Rules
PCA
Well
Capitalized
(Column E)
2019
New Rules
Minimum
Requirements
+ 2.5% Capital
Conservation
Buffer
(Column F)
Leverage Ratio
3% / 4%
5.0%
4.0%
5.0%
N/A
Minimum CET1 Capital
N/A
N/A
4.5%
6.5%
7.0%
Minimum Tier 1 Capital
4.0%
6.0%
6.0%
8.0%
8.5%
Minimum Total Capital
8.0%
10.0%
8.0%
10.0%
10.5%
Transition Dates
Transition Schedule for New Ratios and Capital Definitions
(shading indicates transition periods - all dates are as of January 1)
2015
2016
2017
2018
2019
Leverage Ratio
Ratios
4.00%
4.00%
4.00%
4.00%
4.00%
Minimum Common Equity Tier 1 Capital Ratio
4.50%
4.50%
4.50%
4.50%
4.50%
0.625% 1.250% 1.875%
2.50%
4.50%
5.125%
5.75%
6.375%
7.00%
40%
60%
80%
100%
100%
6.00%
6.00%
6.00%
6.00%
6.00%
Minimum Tier 1 Capital + Capital Conservation Buffer
6.00%
6.625%
7.25%
7.875%
8.50%
Minimum Total Capital
8.00%
8.00%
8.00%
8.00%
8.00%
Minimum Total Capital + Capital Conservation Buffer
8.00%
8.625%
9.25%
9.875% 10.50%
Capital Conservation Buffer (composed of CET1)
Minimum CET1 + Capital Conservation Buffer
Phase-in of most deductions from CET1
Minimum Tier 1 Capital
Example of a Capital Deduction
Transition
Transition Provisions for Items Subject to Threshold Deductions
Transition Period
Percentage of the deduction
Calendar year 2015
40
Calendar year 2016
60
Calendar year 2017
80
Calendar year 2018 and
thereafter
100
Additional Information
• Interagency New Capital Rule Community Bank Guide
http://www.federalreserve.gov/bankinforeg/basel/files/capital_rule_com
munity_bank_guide_20130709.pdf
• Federal Reserve System Community Banking Connections®
FedLinks™ New Capital Rule for Community Banks
http://www.communitybankingconnections.org/fedlinks.cfm
• FDIC Supervisory Insights, Winter 2013, “The New Basel III Definition
of Capital: Understanding the Deductions for Investments in
Unconsolidated Financial Institutions”
https://www.fdic.gov/regulations/examinations/supervisory/insights/siwi
n13/SIwinter13.pdf
Additional Information (Cont’d)
• FFIEC Reporting Forms
Schedule RC-R Regulatory Capital final and proposed form and
instructions
http://www.ffiec.gov/forms031.htm
• Federal Reserve
http://www.federalreserve.gov/apps/reportforms/review.aspx
• Information Collections under Review
http://www.federalreserve.gov/apps/reportforms/review.aspx
• Bank Capital Estimation Tool
https://www.fdic.gov/regulations/capital/
Questions?