The Federal Reserve Board is requesting comment on three proposed rules intended to help ensure banks maintain strong capital positions, enabling them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.
Taken together, the proposals would establish an integrated regulatory capital framework that addresses shortcomings in regulatory capital requirements that became apparent during the recent financial crisis. The proposed rule would implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rulemaking was divided into three proposed rules to minimize burden on smaller and mid-sized banking organizations and to allow firms to focus on the aspects of the proposed revisions that are most relevant to them. The Board is publishing all of the proposed changes to the current regulatory capital rules at the same time so that banking organizations and the general public can understand the overall impact of the proposals when drafting comments.
The first notice of proposed rulemaking (NPR), Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions,
would apply to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies (collectively, banking organizations). Consistent with the international Basel framework, this NPR would:
- Increase the quantity and quality of capital required by proposing a new minimum common equity tier 1 ratio of 4.5% of risk-weighted assets and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets, and raising the minimum tier 1 capital ratio from 4% to 6% of risk-weighted assets
- Revise the definition of capital to improve the ability of regulatory capital instruments to absorb losses
- Establish limitations on capital distributions and certain discretionary bonus payments if additional specified amounts, or "buffers," of common equity tier 1 capital are not met
- Introduce a supplementary leverage ratio for internationally active banking organizations
The Basel III proposal would also revise the Board's prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity. Prompt corrective action is an enforcement framework used by supervisors to constrain the activities of banking organizations based on the level of regulatory capital.
The second NPR, Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements,
also would apply to all banking organizations. This NPR would revise and harmonize the Board's rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified over the past several years.
Banking organizations that are not actively internationally or are not subject to the market risk rules would only need to review the first two NPRs.
The third NPR, Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule
, would apply to banking organizations that are subject to the banking agencies' advanced approaches rule or to their market risk rule.1 This NPR would enhance the risk sensitivity of the current rule for internationally active firms to better address counterparty credit risk and interconnectedness among financial institutions. It also would apply the advanced approaches rule and market risk capital rule to savings and loan holding companies that meet the relevant size, foreign exposure, or trading activity thresholds. As part of the restructuring of the capital rules into an integrated framework, this NPR incorporates the final market risk rule that was approved June 7 by the Board into the framework.
Comments on all three NPRs are due by Sept. 7.