Alert September 25, 2012

Federal Banking Agencies Release a Regulatory Capital Estimation Tool to Assist in Assessing the Potential Effects of the Proposed Basel III Capital Rules

The FRB, FDIC and OCC (the “Agencies”) jointly announced the release of a regulatory capital estimation tool that is designed to help community banking organizations and other interested parties evaluate recently published regulatory capital proposals.  The tool is designed to estimate the potential effects on an institution’s capital ratios of the proposed Basel III Notice of Proposed Rulemaking (which will govern the numerator of the capital ratio calculation) and Standardized Approach Notice of Proposed Rulemaking (which will govern the denominator of the capital ratio calculation).  The estimation tool only allows an institution to determine its compliance with the proposed capital requirements at the time the calculation is conducted, which could be materially different from an institution’s future compliance with the proposed capital standards.  For example, the phased removal of the filter for Accumulated Other Comprehensive Income will require capital to be held against unrealized gains and losses on available-for-sale securities, hedges, and any adjustments to funded status of defined benefit plans, which could increase the volatility of an institution’s required capital levels.  The Agencies noted that the estimation tool should not be relied on as an indicator of an institution’s actual regulatory capital ratios and is not part of the proposed or final rules that the Agencies may adopt.