The Final U.S. Basel III Capital Framework: The Banking Agencies Write a “Tale of Three Industries”

10 July 2013
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Key takeaways:

  • The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have published the final U.S. Basel III capital framework. The Final Rules address and, relative to the Basel I framework under which U.S. banks have operated for several decades, generally make more burdensome all aspects of the banking book capital requirements. Among other changes, the Final Rules raise the required capital ratios, and narrow what constitutes capital.
  • The Final Rules establish a comprehensive set of standardized risk weights for bank assets applicable to all insured or federally regulated U.S. banking organizations other than bank holding companies with $500 million or less of total consolidated assets, and modify risk weights for large banking organizations subject to the Basel II advanced approaches. Because of Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banking organizations subject to the advanced approaches will ultimately be required to calculate risk weights under both the standardized and advanced approaches, and apply the more stringent of the two calculations when evaluating capital adequacy. The Final Rules do not apply directly to non-U.S. banks, but may become more relevant to U.S. broker-dealer and other subsidiaries of non-U.S. banks if the Board finalizes a proposed rule implementing sections 165 and 166 of the Dodd-Frank Act for foreign banking organizations, which could require certain these companies to form U.S. intermediate holding companies that would be subject to the U.S. capital framework.
  • The Final Rules confirm statements by senior members of the Banking Agencies throughout the rulemaking process that U.S. requirements would remain generally anchored to the international Basel III framework. In this regard, despite having received over 2,500 comments on the Proposed Rules, the Banking Agencies left largely intact many aspects of the rules that mirror the international Basel III framework. In certain key respects, however, particularly with respect to the treatment of smaller and community banks and insurance-centric savings and loan holding companies, the Final Rules also evidence the Banking Agencies’ evolving views since the issuance of the Proposed Rules.
  • The Final Rules are a significant milestone in the post-crisis regulatory reform process and for the historical development of the U.S. bank regulatory framework. Despite the issuance of the Final Rules, the policy debate is ongoing, as the Banking Agencies have proposed additional capital-related reforms applicable to the largest U.S. banking organizations.