Alert October 01, 2013

FRB Issues Two Interim Final Rules Concerning Incorporation of Basel III Regulatory Capital Plans and Stress Tests

The FRB issued two interim final rules concerning incorporation of Basel III regulatory capital reforms into covered banking organizations’ capital and business projections used in the organization’s capital plan and stress tests during the next reporting cycle.  On July 2, 2013, the FRB approved revised risk-based and leverage capital requirements for banking organizations that implement the Basel III regulatory reforms and makes certain other changes.  See, a discussion of the foregoing FRB rule (the “Basel III Rule”), in the July 9, 2013 Financial Services Alert.

The FRB’s first interim final rule, “Application of the Revised Capital Framework to the Capital Plan and Stress Test Rules” (the “First Interim Final Rule”) applies only to bank holding companies with $50 billion or more in total consolidated assets (“Large Banking Organizations”).  Under the First Interim Final Rule, Large Banking Organizations must incorporate the revised regulatory capital framework into their capital planning projections and stress tests using the transition paths available under the Basel III Rule.   The FRB also clarifies in the First Interim Final Rule that the FRB will continue to assess a Large Banking Organization’s capital adequacy in the reporting cycle beginning October 1, 2013 “using the current 5% minimum tier 1 common ratio calculated in the same manner as under previous stress and capital plan submissions.”  Large Banking Organizations, however, will need to reflect in their capital plan and stress tests the increased requirements under the Basel III Rule for the leverage ratio, the tier 1 capital ratio and the total risk-based capital ratio.  The First Interim Final Rule also discusses when a Large Banking Organization “would estimate its minimum regulatory capital ratios using the advanced approaches for a given capital plan and stress test cycle.”

The FRB’s second interim final rule, “Annual Company- Run Stress Tests at Banking Organizations with Total Consolidated Assets of More than $10 Billion but less than $50 Billion; One Year Transition Period to Revised Regulatory Capital Framework for 2013-2014 Stress Test Cycle” (the “Second Interim Final Rule”) provides a one-year transition period for intermediate-sized banking organizations, those with total consolidated assets of more than $10 billion but less than $50 billion (“Intermediate-Sized Banking Organizations”) during which they may conduct stress tests (which will be the first set of stress tests submitted to the FRB by Intermediate-Sized Banking Organizations) using the FRB’s current capital rules without reflecting the changes in the Basel III Rule.  The FRB stated that this delay in requiring Intermediate-Sized Banking Organizations to use the Basel III Rule framework is intended to allow such organizations sufficient time “to adjust their internal systems to the revised capital framework.”  Intermediate-Sized Banking Organizations will be required to reflect the Basel III Rule in the stress testing cycle that will begin on October 1, 2014.  The FRB also makes it clear that a state member bank with more than $10 billion in assets but that is a subsidiary of a bank holding company with $50 billion or more of total consolidated assets will be required to reflect the Basel III Rule requirements in the same manner as its parent bank holding company and will not be able to avail itself of the one-year transition period provided to Intermediate-Sized Banking Organizations in the Second Interim Final Rule.

Both the First Interim Final Rule and the Second Interim Final Rule became effective on September 30, 2013 and comments on both rules are due no later than November 25, 2013.