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Basel III Capital Proposals

In June 2012, the Federal Reserve Board, OCC and the FDIC approved three proposals for implementing the Basel III capital standards. The Basel III proposals could fundamentally change how all banks calculate their regulatory capital requirements. The proposals would increase the minimum levels of required capital, narrow the definition of capital and increase the risk weights for various asset classes. We worked with GBA member banks and other experts to study the complex proposals for implementing Basel III capital rules and filed a detailed comment letter Oct. 12, 2012. The comment period closed Oct. 22, 2012.

Below are reference resources about the proposals as well as links to the comment letters filed by GBA, member banks and other industry groups.

News, Proposals and Summaries:

• Nov. 9, 2012: Implementation Delayed Announcement by Regulators

• Basel III NPR

• Standardized Approach NPR

• Advanced Approaches and Market Risk NPR

• FDIC Presentation

• Videos of FDIC Presentation

Tools and Guides:

• FDIC Regulatory Capital Estimation Tools

Comment Letters Filed to Date:

• GBA Comment Letter Filed 10.12.2012
  (Our thanks to GBA's Basel III Task Force for their assistance.)

Georgia Bank Comment Letters:

Other Industry Letters

Click Here to See All Letters Filed with FDIC

Georgia Bank Issues

Based on member and other expert input we've heard, the main concerns to members are:

• Risk weights on loans, especially residential mortgage loans: These are likely to significantly increase. It doesn't matter if it's a first or second lien position. This is especially true if your residential real estate loans contain a “balloon” feature, a process that's common among Georgia community banks. As proposed, most 1-4 family real estate loans with balloon payments would be subjected to higher risk weights up to 200 percent. There are also significant concerns about the risk weighting formulas for HELOCs as wells as noncurrent and nonperforming loans, which already receive protection from losses in the form of ALLL reserves.
   

• Broad Application: the proposed capital rules apply to all GBA-member banks, regardless of size; some banks mistakenly think that if their total assets are less than $500 million, the rules won’t apply; most will.
   

• Loan-to-Value Ratios: How frequently will your bank be required to track the LTV on both residential and commercial real estate during the term of a loan? At the time the loan is made? Quarterly? Daily? No one knows. And if it's during the entire amortization period, how do you do that?
   

• Complex Capital Calculations: All GBA-member banks will face the new administrative task of tracking 13 categories of deductions and adjustments to capital and changes to risk-weighted assets on at least a quarterly basis.

It's not clear whether these calculations will be required more frequently than on a quarterly basis. For one thing, your bank's loan limit is tied to its capital, and there's a question about the timing of that calculation. Also, there are three minimum capital requirements, plus the Capital Conservation Buffer, that you'll need to evaluate. In particular, you'll have to maintain this new Capital Conservation Buffer in order to avoid restrictions on capital distributions and discretionary payouts. This is especially important to a Subchapter “S” bank.

• Trust Preferred Securities: These will be phased out of Tier 1 capital for all member banks that have less than $15 billion in total assets over a 10-year period. The phase-out begins in 2013; the regulators are ignoring the Collins Amendment in Dodd-Frank that supposedly protected TRUPS for community banks. An analysis done for GBA by Associate Member Elaine Demarest, Demarest Strategy Group, Hilton Head, indicates that about 30 percent of Georgia banks still have TRUPS outstanding. Forty-eight community banks still hold about $500 million in TRUPS, with few options for rapidly replacing that capital. Simply extending the phase-out to the maturity of the current securities rather than an arbitrary 2021 deadline would be a better solution.
   

• Potential Volatility of Regulatory Capital:
  
  Unrealized gains (and losses) on Available For Sale securities will be included in regulatory capital, creating the potential for capital volatility and a significant reduction in regulatory capital in a rising rate environment.
  
  Unrealized gains (and losses) on cash flow hedges will still be backed out of regulatory capital, eliminating a key potential way to protect regulatory capital in a rising rate environment; and as mentioned above.
   

• Dividend and bonus restrictions of varying levels if 2% Capital Conservation Buffer is not met.

Those are a few of the many concerns to consider. Here are a few common themes of concern for banks, which can help you structure a good comment letter. Again, the regulators would like to see specific examples for your institution about how the proposals:

• Increase required capital ratios, further reducing lending
   

• Narrow what qualifies as capital (disallows Trust Preferred), which also will decrease lending (complex requirements make compliance difficult and costly)
   

• Vary or increase capital requirements by applying higher risk-weighting to assets (especially real estate loans), hurting lending as well. Individual businesses and consumers and the economy do not need this added hurdle. We've heard from members that the risk-weighting ratios alone could simply force some banks out of making certain types of common and helpful real estate loans in their communities.

More Basel III Resources from ABA

• Access the proposals

• Summaries and key issues from a variety of sources

With questions, contact Joe Brannen, 404.420.2026, or Elizabeth Chandler, 404.420.2027.

GBA's professional staff represents the membership at the state and federal levels. Contact any of them with questions about issues:

Joe Brannen
President & CEO

Elizabeth Chandler
SVP, Government Relations

David Oliver
SVP, Communications & Marketing