Alert June 21, 2011

Banking Agencies Adopt Final Rule Establishing Risk-Based Capital Floor for Large Financial Institutions

The FRB, OCC and FDIC approved a final rule (the “Final Rule”) implementing certain provisions of Section 171 of the Dodd-Frank Act (commonly known as the Collins Amendment).  The Final Rule is being implemented as originally proposed in December 2010 (the “Proposed Rule”).  For more information regarding the Proposed Rule, please see the December 21, 2010 Alert.

Specifically, the Final Rule amends the “advanced approaches rule” of Basel II, as implemented in the United States, by removing the transitional floor periods in the advanced approaches rule and setting the generally applicable risk-based capital requirements as a permanent floor.  As a result, banking organizations operating under the advanced approaches rule must meet the higher of the minimum requirements under those rules and under the generally applicable risk-based capital rules.

The Final Rule also provides increased flexibility for the FRB in establishing appropriate capital requirements for certain low-risk exposures that generally are not held by banks, but may be held by bank holding companies or nonbank financial companies.  More specifically, the Final Rule allows banks, in limited circumstances, to use the capital requirements applicable to bank holding companies.  These circumstances are limited to situations where a bank could not hold the asset except under special authority, and the asset has a risk profile lower than other assets receiving a risk-weight less than 100%.

The Final Rule will be effective 30 days after its publication in the Federal Register, which is expected soon.