Alert December 22, 2009

FDIC Approves Final Rule on Risk-Based Capital Guidelines Related to Adoption of FAS Nos. 166 and 167

The Board of Directors of the FDIC approved a joint interagency final rule (the “Final Rule”) amending the federal banking agencies’ (the “Agencies”) general risk-based capital standards and the advanced risk-based capital adequacy framework (together, the “Risk-Based Capital Guidelines”) in recognition of the regulatory capital impact related to the implementation of Financial Accounting Standards Board’s Statement of Financial Accounting Standards Nos. 166 and 167 (“FAS Nos. 166 and 167”). For further discussion of FAS Nos. 166 and 167, please see the June 16, 2009 Alert, and for additional information on the notice of proposed rulemaking related to the Final Rule (the “NPR”), please see the September 1, 2009 Alert.

The Final Rule permits a banking institution to phase in implementation of FAS Nos. 166 and 167 for purposes of the Risk-Based Capital Guidelines. More specifically, the Final Rule provides for an optional two-quarter implementation delay followed by an optional two-quarter partial implementation of the effect on risk-weighted assets that will result from changes to U.S. generally accepted accounting principles (“GAAP”) from FAS Nos. 166 and 167. The Final Rule also permits banking organizations to include in Tier 2 capital for purposes of the first two regulatory reporting periods following the implementation of FAS Nos. 166 and 167 any increase in the allowance for loan and lease losses (“ALLL”) attributable to assets consolidated under the requirements of FAS Nos. 166 and 167, followed by a two-quarter phase-in of the regulatory restriction on the amount of such ALLL that may be included in Tier 2 capital. (Generally, the Risk-Based Capital Guidelines limit the inclusion of ALLL in Tier 2 capital to 1.25% of risk-weighted assets.) These delays and transitions apply only to the requirements under the Risk-Based Capital Guidelines, however, and not also to the leverage capital ratio. Furthermore, there is no relief with respect to variable interest entities to which banks have provided implicit or voluntary support.

Consistent with the NPR, the Final Rule also eliminates the exclusion of certain consolidated asset-backed commercial paper (ABCP) programs from risk-weighted assets, subject to the delays and transitions described above. In addition, the Final Rule includes the NPR’s reservation of authority permitting the federal banking agencies to require banking organizations to treat entities that are not consolidated under GAAP as if they were consolidated for risk-based capital purposes if the banking organization’s exposure or other relationship to the entity is not commensurate with the actual risk relationship of the banking organization to the entity.

The FRB, OCC and OTS are expected to approve the Final Rule soon. The Final Rule will become effective 60 days after its publication by the Agencies in the Federal Register.